How the U.S.-China Trade Truce Impacts Federal Reserve Policy and Market Risks

The U.S.-China trade truce, announced in May 2025, has injected a brief period of calm into markets rattled by years of escalating tariffs and geopolitical friction. While the agreement temporarily reduces inflationary pressures and eases expectations of Federal Reserve rate hikes, its 90-day timeline and unresolved structural issues pose significant risks to investors. The coming months will test whether this truce evolves into a sustainable détente—or reignites a crisis that reshapes monetary policy and market volatility.

The Immediate Impact: Lower Tariffs, Lower Inflation, and Fed Rate Cut Hopes

The truce’s most immediate effect has been a 0.5–0.8 percentage point reduction in core inflation, as tariffs on Chinese imports dropped from 145% to 30% (see ). Companies like Tesla, reliant on Chinese rare earth metals and components, have seen input costs decline, easing pressure to pass higher prices to consumers. This has bolstered investor optimism that the Fed may finally cut rates this year.

The Federal Reserve’s June 2025 projections now reflect a 50 basis-point rate reduction by year-end, compared to earlier forecasts of a prolonged pause. Lower inflation expectations have also supported a stronger dollar, benefiting U.S. equities and bonds while complicating emerging markets reliant on dollar-denominated debt.

The Lingering Risks: Why the Truce May Fail—and What It Means for the Fed

Despite the truce’s short-term benefits, three critical uncertainties threaten to disrupt this fragile calm:

1. The 90-Day Clock: The temporary pause expires in August 2025. Without progress on structural issues like intellectual property (IP) protections, forced technology transfers, and rare earth mineral dominance, tariffs could reescalate. China’s continued control over 80–92% of the global rare earth market—vital for EV batteries and defense systems—leaves the U.S. vulnerable to supply chain blackouts.

2. Geopolitical Tensions: Unresolved disputes over Hong Kong, South China Sea militarization, and sanctions on Chinese tech firms (e.g., Huawei) could trigger retaliatory measures. Even a partial resumption of tariffs—such as on energy imports—would send inflation spiking anew.

3. Fed Policy Lag: The Fed’s delayed response to inflation has created a “wait-and-see” dilemma. If trade talks collapse, the Fed may be forced to delay rate cuts further, prolonging uncertainty for markets.

Investment Strategy: Balancing Exposure and Hedging

The next three months are a critical window for investors. Here’s how to position portfolios for resilience:

1. Embrace U.S. Assets—but with Caution:
2. Tech and Energy: Companies exposed to China’s rare earth dominance (e.g., Apple, General Motors) benefit from tariff relief but face risks if the truce fails. Pair these with plays on U.S. energy independence, such as shale producers or renewable infrastructure.

3. Dollar Strength: The U.S. dollar’s rally offers opportunities in dollar-denominated bonds and short-term Treasuries.

4. Hedge with Geographic Diversification:

5. Emerging Markets: Countries with weaker dollar ties, like India or Southeast Asia, may benefit from supply chain relocations. However, avoid those overly reliant on Chinese trade.

6. Europe: The euro’s stability and Europe’s tech sector (e.g., ASML) offer diversification against U.S.-centric risks.

7. Currency Hedging:

8. Use currency forwards or options to insulate portfolios from dollar volatility. For example, hedging exposure to Japanese yen or Swiss franc could buffer against a Fed policy misstep.

9. Focus on ESG-Driven Sectors:

10. Rare Earth Recycling: Firms like MP Materials (which processes rare earths in the U.S.) offer long-term value as decoupling from China accelerates.
11. Green Tech: Solar and wind companies (e.g., First Solar) benefit from both the truce’s inflation relief and global decarbonization trends.

The Summer Crossroads: Act Now

The summer of 2025 will decide whether this truce becomes a turning point—or a fleeting pause. Investors must act decisively:

• By August 2025, if talks stall, expect a market sell-off, rising inflation, and a Fed forced to hold rates higher for longer.
• If progress is made, the Fed’s rate cuts could unlock a rally in rate-sensitive sectors like real estate and consumer discretionary.

The stakes are high. The truce has bought time—but not certainty. Investors who blend exposure to U.S. growth with strategic hedges will be best positioned to navigate the coming turbulence.

Act now. Diversify. Hedge. And stay vigilant—the next 90 days will define 2025’s winners and losers.