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The Federal Reserve might have found the time it needs to determine the impact of President Donald Trump's tariff strategies on the world's biggest economy, following a pause in reciprocal levies between the U.S. and China that could settle global trade tensions.
Traders are now betting that the Fed won't lower its benchmark lending rate, pegged at 4.375%, until at least September after the weekend agreement between Washington and Beijing cut tariffs on China-made goods to around 30% and levies on U.S. exports to 10%.
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The two sides also pledged to keep the lowered tariff rates in place for at least 90 days, while establishing a "a mechanism to continue discussions about economic and trade relations.”
The surprise agreement, reached late Sunday following a series of marathon talks in Switzerland led by Treasury Secretary Scott Bessent, opens up around $600 billion in two-way trade between the world's two biggest economies and likely eliminates the risk of a U.S. recession between now and year's end.
The Atlanta Fed's GDPNow tool, which tracks real-time U.S. growth, pegs the economy's second-quarter advance at 2.3%, while the Commerce Department later this month will update its official reading for the first quarter, which it estimated at negative 0.3%.
Fed Chairman Jerome Powell warned last week that "if the large increases in tariffs that have been announced are sustained, they are likely to generate a rise in inflation, a slowdown in economic growth, and an increase in unemployment," as he hinted at stagflation risks and held the central bank's key lending rate in place for a third consecutive meeting.
Related: Fed hints at stagflation risks, holds rates steady amid tariff impact
"Ultimately we think our policy rate is in a good place to stay as we await further clarity on tariffs and ultimately our implications for the economy," Powell said.
Chances of June interest-rate cut reduced
The CME Group's FedWatch has now pushed back the odds of a Fed rate cut until September, while lowering the chances of a quarter-point reduction in June, when the Fed will publish new growth and inflation forecasts. The chances of a June rate cut are now just 8.1%, down from a high as 64.4% this time last month.
Traders are also paring their overall outlook for 2025 rate cuts from three to two, pegging the Federal Funds Rate at between 3.75% and 4% by the end of the year.
Related: Global investors wary of U.S. stocks as trade war concerns grip sentiment
"We may have to wait for the May economic data cycle at minimum and possibly also the June data to get a better read on the US economic trajectory," said John Hardy, global head of macroeconomic strategy at Saxo Bank.