The latest trade deal between the US and China will lessen the tariff shock but the US economy will still experience higher prices and slower growth, US Federal Reserve governor Adriana Kugler has warned.
“I still expect an increase in prices and a slowdown in the economy [but] not to the same extent as before,” she told an economic symposium in Dublin on Monday hosted by the Central Bank of Ireland.
Ms Kugler, a member of the US Federal Reserve board of governors and a former chief economist at the US Department of Labor, said: “My basic outlook, in some sense, may have changed in terms of the extent to which we need to use our tools but not directionally.”
The US and China agreed on Monday a 90-day truce to lower import taxes on goods being traded between the two economies. The deal, hammered out after talks in Switzerland, will reduce US tariffs on Chinese imports from 145 per cent to 30 per cent, while Chinese tariffs on some US imports will fall from 125 per cent to 10 per cent.
Trump’s movie tariff is nuts, but it’s already having an effect here
Is Fair Deal really ‘fair’ if it is effectively taxing savings from already taxed income?
Warren Buffett’s approach to errors offers important lesson for other business leaders
UK needs new EU trade deal, not scraps from the White House
Ms Kugler said the uncertainty surrounding US trade policy still existed.
“This is a 90-day pause, so that leaves everyone waiting to see what happens come August and to see if that’s going to be sustained, but it does help,” she said.
Ms Kugler said tariffs start as a supply shock (increasing prices) before morphing into a demand shock (as consumers get hit by the higher prices and reduce spending).
“The first order effect will be on prices and down the road we’re probably going to see an effect also in terms of economic activity and employment,” she said.
“I am one of those who believes there could be some permanency to these price increases,” Ms Kugler said, highlighting the importance of inflation expectations.
The US Federal Reserve kept interest rates unchanged for a third meeting in a row earlier this month as officials adopted a wait-and-see approach to the heightened uncertainty around US president Donald Trump’s trade policy.
Ms Kugler said US central bank officials were having trouble judging “the pace of growth of the economy” given the rapid changes in trade policy and with households and businesses “frontloading imports ahead of tariffs”.
The US economy contracted by 0.3 per cent in gross domestic product (GDP) terms in the first quarter.
Ms Kugler said the latest GDP figures likely “overstated the deceleration”.
The US economy had, up to this point, remained resilient with a stable labour market, she said.
“In times of heightened uncertainty businesses may delay investment decisions and consumers may increase precautionary savings and postpone discretionary purchases...reverberating through the economy, pushing down aggregate demand,” Ms Kugler said.
The easing of trade tensions between the US and China, suggesting the Trump administration is taking a softer approach to trade negotiations, triggered a rally on stock markets.
Amid hopes the US economy can avoid a recession, markets now expect the Federal Reserve to lower interest rates just twice in 2025.
