Trade war alert downgraded! The impact of U.S. tariffs is less than expected, and Wall Street breathes a sigh of relief

According to the Zhitong Finance APP, the tariffs imposed by the United States on imported goods seem to be slightly lower than the levels threatened by President Donald Trump in April, but this is enough to alleviate Wall Street's concerns about the economy falling into a severe recession.

With the trade agreement reached between the United States and the European Union last week, it now appears that the actual tariff rate will ultimately fall within the range of 15% to 20%. This rate is significantly higher than the low single-digit levels at the beginning of the year, but lower than the 25% or even higher rates that were feared after the tariff announcement on April 2.

Economists had worried that the aggressive tariffs proposed by Trump in the "Liberation Day" statement on April 2 would drive up inflation and lead to a significant slowdown in the economy or even a recession.

However, since then, the pessimistic rhetoric surrounding the tariffs has weakened. Economists believe that the strong backdrop of global economic growth, the lower-than-expected impact of tariffs on long-term inflation, and the generally relaxed financial environment are reasons why the outlook appears less bleak.

For example, JP Morgan has reduced the risk of recession from 60% on Liberation Day to 40%, although this is still above normal levels, it is at least not as pessimistic as before.

JP Morgan's chief economist Bruce Kasman stated, "Tariffs are a tax on American purchases of foreign goods, but this tax burden is unlikely to be large enough to hinder the expansion of the U.S. economy."

Like other institutions, the bank had expected Trump's tariffs to trigger a wave of destructive retaliation globally. However, Kasman noted, "What was originally expected to lead to increased global trade restrictions has now evolved into a small step towards opening markets to the U.S."

Tariffs Remain Dangerous

After the U.S. and EU reached a 15% tariff agreement, there has been a renewed perspective on Wall Street that the risk of economic recession has decreased, although tariffs still have the potential to significantly suppress economic growth.

Morgan Stanley strategist Michael Zezas stated, "We still believe that the most likely outcome is slow economic growth with stubborn inflation. This is not a recession, but the adverse effects of trade and immigration controls on economic growth outweigh the boosts from deregulation and fiscal stimulus."

It is certain that the final outcome of these trade negotiations is still far from clear.

Before the August 1 deadline set by Trump, there are still many issues that need to be resolved. If these issues are not properly addressed by then, major U.S. trading partners, including Japan, will face high tariffs.

Zezas added that further escalation of trade friction "could easily lead the economy toward a mild recession. In summary, we expect the U.S. economy to slow down, but as fiscal conditions and deficits become clearer, the risk of a severe recession is diminishing."

Federal Reserve Expected to Cut Rates in September

The U.S.-EU agreement will provide more considerations for the Federal Reserve's discussion this week on the impact of tariffs on inflation. Since Trump took office, the Federal Reserve has kept the benchmark interest rate unchanged, largely due to policymakers' cautious stance on the inflationary impact of tariffs.

The market expects the Federal Reserve to remain on hold at the conclusion of its meeting on Wednesday. However, the market will be looking for clues about the Fed's next steps, which will be influenced by the final actual tariff rates Market expectations indicate that the Federal Reserve will cut interest rates in September. If the economy weakens while inflation is kept under control, the likelihood of a rate cut in September seems to increase further.

Citigroup economist Andrew Hollenhorst stated, "The effective tariff rate is significantly higher than the levels at the beginning of the year. However, as the tariffs from major trading partners stabilize at around 15%, rather than the much higher rates proposed on April 2, both the market and Federal Reserve officials will become increasingly confident that the drag from tariffs on economic growth and the upward risks to inflation will be relatively limited."