Markets bolstered amid welcome trade deal
Markets cheered as President Trump announced a new U.S.-U.K. trade framework, hailing it as a "breakthrough". The deal retained the 10% universal tariff. Trump said the framework would bring “billions of dollars” in new opportunities for U.S. farmers, citing beef and ethanol exports specifically. British Prime Minister Starmer confirmed the agreement allows U.K. automakers to ship 100,000 vehicles to the U.S. at reduced tariffs and announced a $10 billion Boeing purchase by a major U.K. airline. Markets responded instantly, with the S&P 500 up as much as 1.4%, the CBOE Volatility Index falling to 21 and traders leaning back into risk after weeks of uncertainty.
Meanwhile, in the background of all the tariff talk, the U.S. Federal Reserve (the Fed) held rates steady at 4.25%-4.50%, just as expected. However, the tone of the statement turned notably more cautious. The Fed acknowledged that “risks to both sides of the mandate have risen,” citing elevated inflation, rising unemployment risks and increased uncertainty in the economic outlook. The statement specifically referenced the impact of volatile trade flows on Q1 gross domestic product, hinting at how tariff-driven swings in net exports are muddying the waters for policymakers. For now, the Fed is holding its ground, but the market sees this as a standoff that can’t last. Traders are now pricing in three rate cuts by year-end, up from two prior to the last Federal Open Market Committee meeting.
Across the pond, the Bank of England followed through with a 25-basis-point (quarter-percentage-point) rate cut, bringing its benchmark down to 4.25%. However, the decision was anything but unanimous: five members backed the quarter-point cut, two wanted more, and two voted to hold rates unchanged. For now, the bank’s path remains one of measured easing. We rarely talk about the actions of the Bank of England, but something caught our eye in the statement this week. The bank now believes that even considering tariffs, inflation will be lower by 0.2% in the next two years. Tariffs, as a form of tax, typically lead to immediate price increases, making them inflationary in the short term. However, over time, as higher prices erode consumers’ purchasing power and dampen demand, tariffs can have a deflationary effect on the broader economy.
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