High Tariffs May Trigger Fed's "Recession-Style" Rate Cuts

According to a Jinse report, a research report by China International Capital Corporation (CICC) considers two scenarios. One is where negotiations between the U.S. and its trade partners lack substantial progress, and 90 days later, the effective U.S. tariff rate remains high. In this case, income effects dominate, leading to weakened economic demand, which may prompt the Federal Reserve to start cutting interest rates from July, with a cumulative rate cut of up to 100 basis points for the year. The other scenario is that negotiations yield results and tariffs are lowered. Under this scenario, substitution effects dominate, leading to relatively mild demand shocks, but inflationary pressures are more persistent, potentially causing the Federal Reserve to delay easing its monetary policy and make only a small rate cut in December. For the market, although monetary easing arrives sooner in the first scenario, this "recession-style" rate cut reflects a deterioration in economic fundamentals, which in turn would restrain risk assets.