Reciprocal tariffs imposed by the United States significantly increase the risk of a recession within the country and limit the US Federal Reserve’s ability to reduce interest rates further, Fitch Ratings said in a note.
Following the higher-than-expected tariffs imposed by the US administration, the rating agency projected that economic growth in the US for 2025 is likely to be slower than the 1.7 per cent it had forecast in March.
According to Fitch Ratings, the tariff hikes will lead to higher consumer prices and lower corporate profits in the United States.
“Higher prices will erode real wages, affecting consumer spending, while reduced profits and ongoing policy uncertainty will weigh on business investment,” Fitch noted.
“Upward pressure on goods prices resulting from tariffs—combined with a recent significant increase in US households' medium-term inflation expectations—suggests the Federal Reserve is likely to adopt a more cautious approach regarding further interest rate cuts in the near term.”
Fitch further stated that these negative impacts are expected to outweigh any potential benefits US companies might gain from increased protection against foreign competition.
Additionally, it said the broad-based nature of the tariff hikes limits opportunities for trade diversion, reinforcing the likelihood that the trade war will have adverse consequences across the board.
Since beginning his second term in office, President Trump has reaffirmed his stance on tariff reciprocity, stressing that the United States will match tariffs imposed by other countries, including India, to promote fair trade.
On 2 April, the US President issued an executive order on reciprocal tariffs, introducing additional ad valorem duties ranging from 10 per cent to 50 per cent on imports from all trading partners.
The base duty of 10 per cent is set to take effect from 5 April 2025, with country-specific additional duties becoming effective from 9 April 2025.
The additional tariff on India stands at 26 per cent.
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