How US Trade Tensions With China and Mexico Can Impact Interest Rates

President Donald Trump’s tariff disputes with China and Mexico have already affected companies and consumers. Now that impact could even extend to the Federal Reserve.

During a press conference on Tuesday, Chairman Jerome Powell said that the central bank was keeping an eye on the United States’ escalating tensions with its trading partners, indicating that it could potentially cut interest rates in response to an economic slowdown. (His remarks came shortly after a two-day meeting of the Federal Open Market Committee in Washington, D.C.)

“We do not know how or when these issues will be resolved,” Powell said. “We are closely monitoring the implications of these developments for the U.S. economic outlook, and as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2% objective.”

Investors reacted positively to the suggestion that rates could go lower, with major benchmark indexes in the green on Wednesday. The Dow Jones Industrial Average was up nearly 130 points, or 0.5%, while the S&P 500 and the Nasdaq Composite saw respective gains of 12 points, or 0.4%, and 23 points, or 0.3%.

The Fed has held its benchmark rate in the range between 2.25% and 2.5% this year, with Trump advocating for lower rates as he continues to chase tariffs.

Late in May, the president threatened to impose a 5% tariff on all imports from Mexico, setting off another selling wave on Wall Street. The duties will go into effect on June 10, he said, unless the country takes measures to stop the influx of Central American migrants illegally crossing the border.

“I think it’s more likely that the tariffs go on, and we’ll probably be talking during the time that the tariffs are on, and they’re going to be paid,” Trump said at a news conference in London on Tuesday. He has also suggested raising those levies to 25% by October if the White House’s policy demands fail to be met.

Washington is already embroiled in a trade conflict with Beijing — further strained by Trump’s decision to increase levies from 10% to 25% on $200 billion worth of Chinese goods. The Office of the U.S. Trade Representative proposed another 25% hike in duties on a separate list of products, including footwear.

Watch FN’s interview with these top shoe players.

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