Trump tariff pause does not change fundamentals for a Fed that sees risks ahead

WASHINGTON - President Donald Trump's pause on some announced import taxes may have eased the stress building in financial markets for now, but leaves in place the same set of circumstances that had reset the U.S. economic outlook with rising recession risks and potentially rising inflation.

Major tariffs on China, Mexico and Canada remain in place, accounting for the bulk of U.S. imports, and the public, investors and the U.S. Federal Reserve now have three more months of uncertainty around where a disruptive debate will settle.

With the stage set for a downturn in confidence that Fed officials already worry is sidelining spending and investment, policymakers this week said they continued to view the tariffs as a blow to economic growth that also raised the risk of higher inflation and leaves monetary policy at a difficult crossroads.

Markets continued to function smoothly, they said, despite turbulence including a swoon in global equities and rising rates on U.S. Treasury bonds and corporate credit. Financial conditions have tightened and could begin to squeeze the economy, but officials said they viewed that as a normal repricing of the economic growth outlook given the dramatic changes potentially unfolding in international trade.

The Fed has in the past intervened to allay broad stress in financial markets, but under conditions where liquidity dries up and trading in key markets threatens to stop altogether.

"As we go through this cycle of disruption we do have an obligation as a central bank to really keep our eye on liquidity," Kansas City Fed President Jeff Schmid said on Thursday. "We are literally by the minute watching those markets … It looks to me like the market is adjusting pretty well for the gyrations that have been in the market the last couple of weeks. We are there if needed."