U.S. President Donald Trump announced on Wednesday a 90-day freeze on the reciprocal tariffs he unveiled last week—the announcement came just 13 hours after the levies had gone into effect.

Trump stated the pause was intended to give U.S. trading partners an opportunity to negotiate and admitted that recent turmoil in financial markets influenced his decision.

While the announcement temporarily eased fears of recession that had roiled markets over the past week, tensions with China continued to escalate, limiting the relief.

Due to Trump’s repeated shifts in trade policy, investor confidence in the U.S. government and economy continued to erode. The U.S. dollar posted its largest three-year decline, the S&P 500, after its fastest rally since 2008, gave back gains, and capital outflows from Treasuries persisted.

As investors moved away from U.S. assets, safe-haven demand surged: the yen appreciated more than 2%, the Swiss franc hit a 10-year high, and gold soared to a fresh all-time high near $3,220 per ounce.

Skepticism over potential trade negotiations with U.S. partners and rising tensions with China continue to roil markets.

U.S. Tariffs on China Soar to 145% in Escalating Trade War

Although the reciprocal tariffs were paused, more than 60 trading partners and the European Union remain subject to the 10% baseline duties. China, however, is not part of this pause.

After Beijing imposed a 34% retaliatory tariff, Trump escalated further by raising U.S. tariffs on Chinese imports to 125%. In response, China announced an 84% countermeasure.

Trump then retaliated again, lifting the tariff rate on Chinese goods to 145%. On Friday, Beijing hit back once more, announcing that it would raise its tariffs on U.S. imports to 125%, matching the earlier U.S. move.

Since the early 2000s, many U.S. companies have shifted production to China, which helped lower consumer prices but deepened America’s trade deficit.

In 2024, the U.S. trade deficit with China reached $295 billion—the largest with any country—driving Trump’s aggressive tariff stance. With the U.S. and China trading over $700 billion in goods annually, these escalating tariffs threaten to upend global supply chains.

The spiraling tariff war between the world’s two largest economies risks pushing trade tensions into a full-scale economic conflict—one potentially more damaging than the last.

Before Trump resumed tariff hikes in February, overall U.S.-China duties had settled below 20%, even after the first trade war. Now, tariff rates are well above levels many economists believe could severely damage bilateral trade.

Economists Sound Alarm as U.S. Tariffs Hit Multi-Decade Highs

Considering China’s share of U.S. imports, these tariffs are almost certain to deliver economic shocks. And while reciprocal tariffs have been paused for some countries, the combined effect of the baseline and China-specific measures has pushed the U.S. average import duty to 24%—up from just 2% before Trump began his second term.

Economists warn that such a spike could deliver a lasting blow to growth and inflation. According to PIMCO, every 1-point increase in average tariffs could shave off 0.1 percentage points from GDP growth and lift inflation by a similar amount.

Sustained at current levels, these tariffs would likely bring higher consumer prices and a contraction in economic activity. These forecasts do not yet factor in the potential impacts of Trump’s proposed tax and immigration policies.

While tax cuts could help cushion the tariff shock, stricter immigration enforcement may further drag on growth. According to the Dallas Fed, current deportation rates could reduce GDP by 1 percentage point this year and raise inflation by 0.3 points—potentially rising to a 2% drag by 2026 if the pace accelerates.

Looking Ahead: Will the Fed Move in June or Stay on Hold?

Altogether, there is little in the current backdrop to ease prevailing recession fears. These concerns have kept market expectations for Fed rate cuts elevated, and Thursday’s CPI report added fuel to the fire.

According to the U.S. Bureau of Labor Statistics, headline CPI declined by 0.1% in March after a 0.2% increase in February, bringing the year-over-year rate down to 2.4%. Core CPI, which excludes food and energy, rose 2.8% annually—the smallest gain since 2021.

Following the report, swap markets priced in 88 basis points of cuts by year-end, up from 75 before the release, with the first cut expected in June. This has added pressure to the dollar while reinforcing flows into other safe-haven assets.

However, the report indicated that the impact of the February–March 20% tariffs on Chinese goods has yet to pass through to consumer prices. As Atlanta Fed President Raphael Bostic recently pointed out, pre-tariff stockpiling may delay the inflationary effects until at least June.

Looking ahead, if inflation remains subdued and economic data continues to soften, markets may continue to price in aggressive easing. However, Fed officials remain cautious and are not aligned with market expectations.

Boston Fed President Susan Collins noted that tariff-driven inflation could delay further cuts, while Kansas City Fed President Jeff Schmid said he would prioritize controlling inflation in a stagflation scenario. Other officials echoed similar sentiments, warning that tariffs could result in more persistent inflation and that policy is well-positioned for now.

As Duhani Capital Research team, we assess the Fed is unlikely to act as early as June, given the ongoing 90-day pause—which expires at the end of the month—and the escalating trade tensions with China. For the Fed to justify a move that soon, inflation would likely need to make further progress toward the target, and signs of a meaningful deterioration in activity would have to emerge.

Still, as long as recession fears dominate market sentiment, expectations for rate cuts may remain firm. This could keep downward pressure on the dollar and support other currencies such as the euro, yen, and Swiss franc. Meanwhile, gold may continue to benefit from a weaker greenback, easing expectations, and safe-haven flows driven by uncertainty.