Fed will keep rates unchanged due to subdued inflation and easing US-China trade tensions

More subdued-than-expected inflation and an easing of trade tensions between Washington and Beijing have alleviated concerns about reduced spending by US households and businesses in the near term. 

Wall Street firms are easing their recession forecasts, giving the Federal Reserve (Fed) room to maintain interest rates unchanged.

JPMorgan Chase and Barclays revised their recession forecasts on May 13 to reflect the improved economic outlook following the US-China deal.

JPMorgan economists now estimate the probability of recession at under 50%. Barclays economists have completely ruled out a recession in their forecasts. Both banks had previously anticipated significant harm to companies and consumers from tariffs, leading to reduced spending and business activity.

Financial markets have also scaled back expectations for a Fed rate cut due to a 2.3% year-on-year increase in consumer prices in April. Investors now expect just two rate cuts by the end of the year, starting in September, down from previous projections of four 0.25 percentage-point reductions.

Fed policymakers warn that cutting interest rates while inflation remains elevated could trigger even faster price growth.