Although Fed Chairman Powell is giving little away about the timing of possible future rate adjustments, the FOMC sees clear upside risks to inflation and downside risks to growth, partly as a result of Trump's trade policy. However, uncertainty remains high and it is questionable whether this picture will be clearer at the next meeting in mid-June. Then the committee will have the opportunity to update the economic projections and the well-known 'dot plot', which during the FOMC meeting in March still assumed a rate cut of 50 basis points in 2025.
According to Mark Dowding, Chief Investment Officer at RBC BlueBay Asset Management, financial markets have become too quickly convinced that Trump's change of course in April means that the administration is now opting for a pragmatic approach with a focus on dealmaking. “We see that investors are now feeling comfortable, but we think that is premature. Although markets seem to be stabilizing temporarily, we expect problems to resurface,” says Dowding. For that reason, RBC BlueBay has added additional hedges to risky assets and reduced exposure. “We have reduced our positions after increasing them in April during the dip following the Liberation Day announcements,” Dowding explains.
There has been some optimism surrounding the US-UK trade deal, but according to Dowding, this is premature: “There is a lot of attention to this deal, but the details remain remarkably scarce.” Agreements are also expected in the coming weeks with India, Israel, Australia, Japan and South Korea, among others. However, RBC BlueBay does not expect any progress on trade deals with the EU until after July. As for China, some de-escalation of tariffs may be possible, but even in the most optimistic scenario it seems unrealistic to expect tariffs to fall below 60%. “The US administration continues to cling to the idea that reliance on Chinese imports needs to be reduced. That does not seem to change for the time being,” says Dowding.
Interestingly, Trump recently suggested that he would also impose tariffs on foreign films, indicating that his protectionist policies may be extending beyond goods to services. According to Dowding, this development deserves attention: "This is a signal that trade tensions could widen. If that happens, the impact on the global economy could be greater than many currently estimate."
Due to the ongoing trade disruption and the disrupted trade relations, RBC BlueBay has lowered its growth forecast for the US economy to around 0.5% on an annual basis. For the time being, Dowding does not expect a recession, but he emphasizes that the labor market must be monitored critically. “If unemployment rises faster than we currently estimate, an economic contraction is not unthinkable,” he warns. According to Dowding, inflation could rise to over 4%, depending on developments in food and energy prices. “If the export of US food products to China stops, that could depress prices, but uncertainty remains high,” he adds.
