The outcome of next week’s meeting between Chinese President Xi Jinping and American counterpart Donald Trump at the G20 summit in Japan will play a major determining factor in the outlook for the economy in the United States and the prospects that the US Federal Reserve will cut interest rates in the next three to six months, analysts said. While the meeting is not expected to deliver a trade deal, Trump and Xi may break the current stalemate by agreeing to a tariff ceasefire as they did at their last meeting in Argentina in December, while also rebuilding a negotiation framework to continue the trade talks, the analysts said. “We think the timing and magnitude of any policy easing is uncertain and somewhat dependent on US-China trade relations. If [aggressive] US trade rhetoric or actions were to heat up, we could see the Fed ease policy as early as this summer,” said Andrew Wilson, CEO for Europe, the Middle East and Africa and global head of fixed income at Goldman Sachs Asset Management. “However, if trade tensions were to cool down, we think the Fed would await data clarity and lower rates from autumn onwards.” In May, the Trump administration accused China of reneging on provisions of a tentative trade deal, with the US wasting no time in doubling tariffs on US$200 billion of Chinese imports and threatening to levy tariffs on a further US$300 billion of goods, including consumer electronic products including smartphones, that have so far avoided sanctions. The US also effectively banned American companies from selling components and software to Chinese telecommunications giant Huawei, escalating the trade conflict into a technology battle between the world’s two largest economies. Raymond Cheung, country head of global sales trading at Denmark-headquartered broker Saxo Capital Markets, warned that further US tariffs would have a serious impact not just on Chinese imports but also on the outlook for the US domestic economy and US Federal Reserve rate decisions. New US tariffs on electronic products may lead to higher costs and fewer sourcing alternatives for its technology firms, while the conflict could also slowdown growth, which could eventually drag down other American sectors such as finance, real estate and consumer products, according to Cheung. Trump may want to extend the effective date of the tariffs for another three months if the two sides can patch things up in Japan. The Fed is facing all these external factors that will have a domino effect back on the US domestic economy Raymond Cheung “Trump may want to extend the effective date of the tariffs for another three months if the two sides can patch things up in Japan,” Cheung said. “The Fed is facing all these external factors that will have a domino effect back on the US domestic economy.” On Wednesday, the US Federal Reserve held interest rates, while its forward guidance did not indicate an especially soft policy stance, projecting the next rate cut in 2020. But analysts and fund managers focused on the change in the language of the US Federal Reserve’s statement, with words such as “cautious” and “patient” that were used in previous statements dropped and replaced with active phrases such as “ready to cut rates.” Many analyst are expecting rate cuts sooner than next year, with growing projections that the US Federal Reserve will trim rates by a quarter of a percentage point at its meeting next month. “With 70 per cent of the US economy driven by consumer spending, the proposed additional tariffs could have meaningful implications on overall economic growth as it will affect consumer goods more directly,” said Peter Yiu, associate director, private client adviser at Charles Schwab financial consultants in Hong Kong. “Should mounting risks from trade continue to hit the US, [Federal Reserve chair Jerome] Powell has signalled that policymakers were ready to help support the economy.” The uncertainty surrounding trade-related policies adds to the challenges facing the US Federal Reserve to not cut rates too soon if the economy remains strong, but also not wait too long if the economy starts to weaken. Kerry Craig, global market strategist at JP Morgan Asset Management, said that Powell walked a fine line in his comments this week, highlighting a level of confidence in the strength of the US economy, even as growth is expected to slow going forward because of increasing vulnerabilities created by global politics, particularly the US-China trade war. “The ambiguity surrounding the trade narrative and the rapid deterioration in the US-China relationship highlights the difficulty for the Fed,” said Craig. Sign up to our China at a Glance newsletter and you'll receive an exclusive 3-day G20 news package in collaboration with POLITICO (coverage from 28-30 June)