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Investing.com - The underlying U.S. economy is more resilient to tariff-fueled pressures than investors give it credit for, according to analysts at BofA.
In a note to clients, the brokerage said that, while they have downgraded their forecasts for U.S. growth, they do not anticipate the world’s largest economy will slide into a recession because of U.S. President Donald Trump’s aggressive trade agenda.
"Despite the massive tariff hikes in early April, we stayed relatively sanguine because we anticipated de-escalation, along with fiscal easing, down the line," the analysts wrote.
Trump and U.S. officials have eased back from recently-punishing levies in recent days.
On Monday, the U.S. and China agreed to lower tit-for-tat tariffs and temporarily delay their respective levies for 90 days.
The move came after Trump slapped soaring duties of at least 145% on China, leading Beijing to respond with its own retaliatory tariffs of 125%.
Following the deal, the U.S. tariffs on China were brought down to 30%, folding in a baseline 10% levy and separate 20% duties related to Beijing’s alleged role in the flow of the illegal drug fentanyl. China, meanwhile, cut its tariffs on U.S. items to 10%.
Trump also previously announced -- and then paused -- so-called "reciprocal" tariffs on both friends and adversaries in April.
The BofA analysts said the so-called "Trump put" -- or the belief that the president will intervene to turn around falling markets -- was triggered. Deep ructions shook the stock and bond markets after Trump first instituted his elevated tariffs on April 2, and the president later noted these jitters as a factor behind his decision to postpone the duties.
However, the level at which the Federal Reserve will step in to prop up markets is "much lower", the BofA analysts said. Since January, the strategists have projected that the Fed will not slash interest rates this year.
"This is partly because our read on the underlying health of the economy, and the Trump administration’s response suggests there won’t be a recession," they wrote. "But we also think the markets’ view on the Fed reaction function is too dovish."
The Fed cannot afford to cut rates preemptively while inflation continues to overshoot its 2% target level and there are lingering risks of increased unemployment, the analysts said.