The Fed has no real reason to cut rates, unless it’s to save the US economy from Donald Trump’s tariffs

Ordinarily, a near 50-year low in unemployment and some indications of a pickup in inflation would hardly justify a cut in US interest rates. Yet the Federal Reserve is set to make an “insurance” cut on July 31, as the negative implications of some Trump administration policies weigh on the global economy.

Central to the Fed’s thinking is the United States’ trade war with China. Back in 2018, the economic stimulus from President Donald Trump’s tax cuts underpinned the argument for the Fed’s rate hikes. But the US central bank might have underestimated the negative economic impact of Trump’s policy of setting tariffs on imports from China amid Washington’s attempts to rebalance a US-China trade relationship it feels is too skewed towards Beijing.

Tariffs should really be seen as taxes on imports that are levied as Chinese goods enter the US. Unless a US-registered importer chooses to absorb the tariffs and hurt its own profit margins, or it convinces a Chinese exporter to accept lower prices, then the tariffs will be passed on to US consumers in the form of higher prices.

In a letter in May, US footwear companies including Nike explained to Trump that additional tariffs on shoes would show up at the checkout: “There should be no misunderstanding that US consumers pay for tariffs on products that are imported.”

In truth, Trump’s wider attempt to reverse a decades-long trend away from globalisation and towards an “America First” agenda was always going to disrupt the world economy. The Trump administration’s recourse to tariffs – and not just on imported goods from China – has caused material disruption to global trade and to the global supply chain.

One indication of that was surely the dismal data released last Friday by Singapore, one of the world’s most open economies. On a seasonally adjusted and annualised basis, the Singaporean economy shrank 3.4 per cent in the second quarter, the biggest contraction in nearly seven years. A Reuters poll of economists had forecast an expansion of 0.1 per cent.