What’s the read-through from the US-China trade truce for the Fed?

That’s not a straightforward question.

As Jerome Powell’s been at pains to emphasize of late, outlandish tariffs move the Fed away from both of its goals by increasing upside risks to inflation and downside risks to growth, with the latter suggestive of higher unemployment. In other words: The trade war chanced stagflation.

The worry for the Committee is that in a bitter, protracted trade dispute, the Fed’s goals end up “in tension,” forcing policymakers to choose between cutting rates to shore up growth at the risk of exacerbating inflation or holding firm in the interest of preserving progress on price stability at the risk of a recession.

In that context, you could view the de-escalation between Washington and Beijing two ways. On one hand, it reduces upside inflation risks, and thereby gives the Committee more leeway to cut rates. On the other hand, it removes the left-tail risk of a severe, self-inflicted recession, buying the Committee more time to be patient.

The market’s initial reaction favored the latter interpretation. Market pricing for 2025 Fed cuts was just 55bps on Monday. It was 79bps just a few sessions ago. So, traders have taken out one of three quarter-point cuts priced into the forward curve in light of the UK trade “deal” and the China climb-down.

Note from the chart that 2025 rate-cut pricing reflected 100bps of easing — four quarter-point cuts — as of late-April.

“[The] narrative was that the Fed can’t cut because of very high tariffs,” Marko Kolanovic said Monday, alluding to the quandary: The Fed’s excuse for not rushing into more cuts was that tariffs are likely to be inflationary. Now, tariffs are apparently going to be much less onerous, which ostensibly frees the Fed up to at least consider bringing forward future easing. And yet, the suddenly brighter growth outlook argues in the opposite direction, particularly given that even in a benign scenario, tariffs will be multiples of their pre-“Trump 2.0” levels.

All we know for sure is that Powell was correct to suggest — as he did repeatedly and emphatically during this month’s post-FOMC presser — that trying to guess at where tariffs will ultimately settle is a fool’s errand.

Monday’s Fed speakers tried to be diplomatic about the haphazard character of Trump’s policy shifts, while reiterating that even if the average US tariff rate ends up being much lower than the worst-case tipped by the “Liberation Day” unveil, it’ll still be far higher than it was when Trump took office.

“Trade policies are evolving and are likely to continue shifting, even as recently as this morning,” Adriana Kugler said, at an event hosted by the Central Bank of Ireland. “If tariffs remain significantly larger relative to earlier in the year, the same is likely to be true for the economic effects, which will include higher inflation and slower growth.”

“It is definitely less stagflationarily than the path they were on,” Austan Goolsbee mused, about Monday’s de-escalation. “Yet it’s [still] three to five times higher than what it was before, so it is going to have a stagflationary impulse on the economy,” he added. “It’s going to make growth slower and make prices rise.”