Trump tariff pause won't change fundamentals for a Fed that sees risks ahead

Howard Schneider and Ann Saphir

Thu, Apr 10, 2025, 12:15 PM 4 min read

By Howard Schneider and Ann Saphir

WASHINGTON (Reuters) - President Donald Trump's pause on some of his new import taxes may have lessened the stress that had been building in financial markets for now, but leaves in place the same set of circumstances that had reset the U.S. economic outlook with rising recession risks and potentially rising inflation.

Major tariffs on China, Mexico and Canada remain in place, accounting for the bulk of U.S. imports, and the public, investors and the U.S. Federal Reserve now have three more months of uncertainty around where a disruptive debate will settle. In all, it sets the stage for a continued downturn in confidence that Fed officials worry is already sidelining spending and investment.

In the first remarks since Trump announced a 90-day pause on some tariffs, Fed officials made no mention of the shift, but emphasized what they had before - that the tariffs still in place had already raised the risks of simultaneously higher inflation and slowing growth.

"It appears as though we have seen a marked increase in the upside risks around inflation along with elevated downside risks to the outlook for employment and growth," Kansas City Fed President Jeff Schmid said on Thursday. "With renewed price pressures likely, I am not willing to take any chances when it comes to maintaining the Fed's credibility on inflation."

Dallas Fed President Lorie Logan, in comments to a Peterson Institute for International Economics event on trade and immigration, made a similar point.

"To sustainably achieve both of our dual-mandate goals, it will be important to keep any tariff-related price increases from fostering more persistent inflation," she said. "For now, I believe the stance of monetary policy is well positioned."

Consumer prices fell on a month-to-month basis in March, driven lower by volatile energy prices, but analysts considered it an interlude to the tariff price shock ahead.

If the Trump climbdown on tariffs did little to shift views at the Fed, where policymakers seem ready to keep interest rates on hold until there is more clarity on the economy's direction, neither did financial markets snap fully back to normal following Trump's suspension of often steep levies on dozens of countries, an apparent nod to concerns his abrupt shift in global trade policy might spark a larger financial crisis.

Stocks were about 3% lower in the U.S. after Wednesday's stunning jump; there was only a slight narrowing in the premium paid by less creditworthy companies to borrow and the risk premium for high-grade bonds actually increased a bit. Corporate bond issuance risks grinding to a halt, with the most creditworthy companies raising only $10 billion so far in April compared to $190 billion over a similar period in March, and only a single lower-rated issue made this month so far.