President Donald Trump’s pause on some tariffs has eased financial market stress for now, but leaves in place the same economic outlook with rising recession risks and higher inflation. Major tariffs on China, Mexico, and Canada remain in place, accounting for most US imports, and uncertainty lingers over where a dispute will settle.
Federal Reserve officials continue to view the tariffs as a blow to economic growth, which raises the risk of higher inflation. Despite turbulence in global markets and rising interest rates, officials see this as a normal repricing of the economic growth outlook given the dramatic changes in international trade.
The Fed has intervened before to calm broad stress in financial markets, but under conditions where liquidity dries up and trading threatens to stop. Officials are monitoring market conditions closely, with Kansas City Fed President Jeff Schmid saying they have an “obligation as a central bank” to keep an eye on liquidity.
Trump’s climbdown from sweeping tariffs did not shift the Fed’s view that the actions already announced will slow the economy and lead to rising joblessness and prices. Dallas Fed President Lorie Logan said it is crucial for the Fed to maintain its credibility on inflation, while Chicago Fed President Austan Goolsbee noted there is no generic playbook for responding to tariffs.
Financial markets continue to function smoothly, but yields have edged higher, indicating some mistrust of US growth. Stocks surrendered most of Wednesday’s gains, and corporate bond issuance risks grinding to a halt. Rising costs of corporate credit can signal dropping investment spending and stress if weaker firms struggle to refinance or cover higher debt costs.
The Fed is awaiting more clarity ahead of any policy change, with St. Louis Fed President Alberto Musalem focusing on financial conditions and financing conditions. Tightening financial conditions could have a headwind to growth, officials said.
Source: https://www.reuters.com/markets/trump-tariff-pause-wont-change-fundamentals-fed-that-sees-risks-ahead-2025-04-10