Fed Official Signals July Rate Cut Amid Economic Slowdown

US Tariffs Spark Recession Fears in Europe, Prompting Fed Scrutiny

A top U.S. Federal Reserve official has indicated a potential interest rate cut at the end of July, citing a significant deceleration in the American economy’s momentum and rising unemployment concerns.

Economists Warn of Tariffs’ Broad Impact

Federal Reserve Governor **Christopher Waller** expressed his view that a rate reduction is warranted due to these economic headwinds. He is not alone in his assessment; **Ryan Sweet** of Oxford Economics predicts that President Trump’s tariffs will negatively impact U.S. GDP growth. The hit to US GDP growth is 0.1ppt this year and 0.3ppts next year, he stated in a client note.

European Economy Faces Tariff Threat

Beyond the domestic implications, the tariffs are also poised to exert considerable pressure on the European economy. Trump has threatened a 30% levy on trade with Europe, a move that analysts warn could precipitate a recession. A 30% US tariff on EU exports would send the EZ economy into recession in the second half of 2025, cautioned **Claus Vistesen** of Pantheon Macroeconomics. He added that markets are not fully pricing in these threats, but a U.S.-EU trade escalation remains a substantial near-term risk. The European Central Bank (ECB) is reportedly holding back on retaliatory measures unless a 30% tariff becomes a certainty.

Growth Forecasts Downgraded for Eurozone

Pantheon Macroeconomics anticipates that a sustained 30% U.S. tariff would reduce their 2025 and 2026 growth forecasts for the Eurozone to 0.7% and 0.8%, respectively, a downward revision of 0.3 percentage points and 0.5 percentage points. Similarly, **Angel Talavera** at Oxford Economics estimates that the proposed tariffs could shave up to 0.3 percentage points off annual Eurozone growth over the next two years, potentially leading to stagnant growth in the coming quarters.

UK Unemployment Rises as Trade Reliance Remains

Meanwhile, the United Kingdom is already grappling with rising unemployment, which has climbed to 4.7% over the past three months, marking a four-year high. The U.S. remains a critical export market for both Europe and Britain, with approximately 20% of EU exports, valued at around €500 billion ($581 billion), directed to the United States. The sheer scale of this economic relationship makes it difficult for Europe to quickly pivot to alternative markets, especially for key sectors like pharmaceuticals and automobiles, according to **Matt Swannell** of Oxford Economics.

Complexity and Volatility of Tariff Demands

The complexity and fluctuating nature of President Trump’s tariff demands add to the uncertainty. Beyond a potential universal tariff, specific sectors face substantial levies. For instance, a 25% tariff on cars and parts, alongside a 50% tariff on aluminum and steel, could lead to effective tariff rates ranging from 12% to 17%, significantly higher than the approximately 1% seen earlier in the year. Pharmaceuticals, a major European export, could face a staggering 200% tariff on entry to the U.S., as noted by **Marion Muehlberger** and **Ursula Walther** of Deutsche Bank. The dynamic nature of these demands, with a 30% tariff only recently becoming a consideration, contrasts with earlier ECB scenarios that projected much lower tariff levels.

European Markets Show Resilience Amidst Uncertainty

Despite these economic pressures, European stock markets have exhibited remarkable strength, with the Stoxx Europe 600 and the UK’s FTSE 100 trading at or near all-time highs. Germany’s DAX index has seen a significant surge of 21.69% year-to-date, partly driven by substantial fiscal spending on defense. In pre-market trading, U.S. S&P 500 futures were flat, while the STOXX Europe 600 and the UK’s FTSE 100 were up, and China’s CSI 300 also saw gains. Japan’s Nikkei 225 experienced a slight decline, and Bitcoin remained above $118,000.