After the Geneva talks between China and the USA, both sides significantly reduced tariffs, lowering the risk of an economic recession in the USA. However, the effective tax rate of 15.5% is still a significant increase from last year's 2.4%, indicating that the inflation risk has not been completely alleviated.
According to the Zhitong Finance APP, China International Capital Corporation has released a Research Report stating that after the Sino-US Geneva talks, both sides significantly reduced tariffs, and the risk of a recession in the USA has declined. However, the effective tax rate of 15.5% is still a significant increase from last year's 2.4%, and the inflation risk has not been completely resolved. Historical experience shows that price increases generally occur 2-3 months after tariffs are fully implemented, and the latest inflation data cannot yet reflect this. The institution believes that the easing of tariffs will lessen the Federal Reserve's concerns about employment (recession), thereby placing more emphasis on inflation risks, which means that the Federal Reserve may continue to wait for clearer inflation data. China International Capital Corporation has pushed back its forecast for the Federal Reserve's interest rate cuts to the fourth quarter (previously in the third quarter) and expects that the rate cut for the year will be less than 50 basis points.
The main points from China International Capital Corporation are as follows:
The risk of a recession in the USA has declined.
After the Sino-US Geneva talks, both sides agreed to reduce tariffs. The institution's calculations show that under the latest policy, the USA's effective tariff rate will decrease from the previous 28.4% to 15.5%, significantly reducing the risk of recession. The decrease in tariffs has alleviated the pressure on the import costs of USA commodities, restoring consumer confidence while reducing the risks of corporate layoffs and bankruptcies, which helps stabilize overall economic demand. Additionally, the tariff reductions have also boosted market risk appetite, leading to a significant rebound in global stock markets and helping to ease the financial market volatility that previously arose from escalating trade friction and high uncertainty.
However, the 15.5% tax rate is still a significant increase from last year's 2.4%. Under the latest tariff policy, a 10% baseline tariff still exists for the majority of countries worldwide, and this remaining tariff will continue to act as a supply shock suppressing growth. The institution's calculations show that, under the new tariff levels implemented according to the agreement, the actual GDP growth rate of the USA in 2025 may decline by an additional 0.73 percentage points compared to scenarios without tariffs, which is a significant narrowing from the 1.4 percentage point impact prior to tariff reductions. Simply referencing the historical experience of Okun's Law, a decline in GDP growth typically accompanies a rise in unemployment rates; the latest tariffs may correspond to an additional rise in the unemployment rate of 0.5 percentage points for the entire year of 2025. Since labor supply in 2025 will not be as high as in previous years when immigration was significantly inflowing, the magnitude of the unemployment rate increase may be slightly smaller, but the number of new jobs will decrease alongside the economic slowdown, and the labor market will continue to show a tendency to slow down.
The inflation risk has not been completely resolved.
Due to the tax rate still rising compared to last year, along with the depreciation of the dollar, USA imported commodities are still facing price increase pressures. With the implementation of reciprocal tariffs, USA's federal tariff revenue surged in April, which also means that businesses or residents will still bear the cost of tariffs. Although the latest published CPI inflation data for April in the USA was lower than market expectations, this was mainly due to weaker service prices (especially airfare), some commodity prices still showed signs of increase. For instance, the prices of entertainment commodities rose by 0.4%, with audio equipment prices skyrocketing by 8.8%, photography equipment prices increasing by 2.2%, Furniture and bedding prices rising by 1.5%, and home appliances increasing by 0.8%.
In addition, due to businesses previously importing some inventory in advance, inflation may be delayed in manifesting. On a micro-level, there are also examples, such as South Korea's Hyundai Motor stating it will maintain current prices unchanged until June 2nd to reduce the disturbance of tariffs on consumers. Ultimately, businesses will still pass costs onto consumers. The Dallas Fed's April manufacturing survey showed that 75% of surveyed manufacturers plan to pass tariff costs to the consumer side, with more than half wanting to pass on most or even all of the tariff costs.
Referring to the experience of 2018, price increases generally occur 2-3 months after tariffs are fully implemented, which means the latest inflation data cannot yet reflect this. The organization expects that under the current tariffs, USA imported commodity prices will still rise in the summer, which will cause the year-on-year growth rate of core CPI to reach 3.1%, 3.4%, and 3.8% by the end of the second, third, and fourth quarters, respectively. This also means that the April inflation rate may be the low point for the entire year.
The Federal Reserve currently places more emphasis on inflation.
The two government targets of the Federal Reserve are a 2% inflation rate and full employment. After the reduction of tariffs between China and the USA, the risk of recession has decreased, but the risk of inflation has not been entirely alleviated, which will force the Federal Reserve to continue to wait and observe. At the May FOMC press conference, Federal Reserve Chairman Powell stated there is no rush to lower interest rates, and more certainty on trade policies is needed. In his speech, he mentioned the word "wait" 22 times and clearly stated that there would be no preemptive rate cuts. This indicates that decision-makers are unlikely to take action on interest rate cuts before seeing clear, data that proves inflation is continuously slowing down. New York Fed President and permanent voting member Williams also released hawkish signals, stating that discussions about preemptive rate cuts are "misplaced," with other officials recently expressing similar cautious views regarding rate cuts.
The organization has postponed its prediction for the timing of Federal Reserve interest rate cuts to the fourth quarter. Previously, the organization believed that if negotiations did not progress and tariffs remained high, it would put tremendous pressure on USA economic growth, possibly leading to a recession. In this case, the Federal Reserve might be forced into a "recessionary" rate cut, with a cumulative rate cut of 100 basis points from the third quarter. However, the current situation shows that negotiations have made substantial progress and tariffs have been lowered, thus the Federal Reserve will also postpone rate cuts. The organization expects rate cuts to begin in the fourth quarter, with the total reduction for the year being less than 50 basis points.
Forecast Risks: Policy fluctuations, weak demand.
The organization identified two risks in its forecasts. One is that tariff policies may change again, exacerbating the Federal Reserve's concerns about slowing employment. Currently, USA has only paused some tariff measures, and whether they can be fully canceled still depends on negotiations. If tariffs "return" after the pause period, it could bring a "second shock" to the USA economy, which would reignite concerns about market recession, worsen risk appetite, and potentially trigger a new round of "bad news" style rate cut trades.
Another risk is that weak demand leads to a decline in oil prices and service inflation, offsetting the "input" inflationary pressure brought about by tariffs. Recently, global Crude Oil Product prices have significantly retreated, influenced by concerns over weakening global demand as well as supply pressure from expected OPEC production increases. If oil prices continue to decline markedly, it may provide more room for easing global inflation. Additionally, weak service Consumer activity this year has led to lower prices for services like flights and hotels, which helps reduce overall inflation levels. Another notable change is in Pharmaceutical prices. On May 12, 2025, Trump signed an executive order announcing the implementation of "Most-Favored Nation" policy, requiring American prescription drug prices to be reduced to the lowest levels globally. Trump claimed that American Pharmaceutical prices will decrease by 50% to 90%. This move may pose downward pressure on Medical inflation, but the specific impact still needs to be observed.
Chart 1: The latest effective tariff rate in the USA will decrease from the previous 28.4% to 15.5%.
Note: 1900-1918 and 2024 are the fiscal years of the USA government, while 1919-2023 are calendar years, and 2025 is an estimate by the author.
Sources: USITC, Wind, China International Capital Corporation Research Department.
Chart 2: Tariff revenue in the USA surged significantly in April.
Source: Haver, China International Capital Corporation Research Department.
Chart 3: Manufacturer cost pressure and willingness to pass on prices are rising.
Source: Haver, China International Capital Corporation Research Department.
Chart 4: Retailers' current inventory can support approximately 1-2 months of sales.
