U.S. Economics: 90-Day Tariff Pause Not as Helpful as it Sounds

In a new Citi Research note, U.S. economists Andrew Hollenhorst and Veronica Clark warn that pausing reciprocal tariffs, excluding China, doesn’t mean the U.S. economy has avoided a slowdown in growth and a rise in inflation.

Our analysis comes on the heels of the Trump administration’s announcement that recently unveiled reciprocal tariffs will be paused for 90 days, allowing countries time to negotiate with the U.S. This lowers the average effective tariff rate, but by less than meets the eye. That’s for several reasons:

1. The baseline 10% tariff is being maintained against all countries, and amounts to a substantial increase in many cases. For now, we also assume this 10% rate applies to the European Union. We also assume no change to tariffs faced by Canada and Mexico.
2. The U.S. is imposing new tariffs of 105% on Chinese goods, in addition to the 20% related to the border and fentanyl and a 10% effective rate prior to the Trump administration.
3. Sector-specific tariffs on autos, aluminum and steel remain in place, with new tariffs on pharmaceuticals and semiconductors expected.

Our calculations show the average effective tariff rate rising 21 percentage points from its level at the beginning of 2025. It wouldn’t be surprising to see at least some of the China tariffs reduced, but that could be offset by higher sector-specific tariffs or reciprocal tariffs that come back into effect after 90 days.

In short, to a first-order approximation the rise in effective tariff rates isn’t that much less than what we’d been forecasting.

The growth dynamics of a 90-day pause are complex. U.S. households and firms sourcing goods from overseas will now try to complete these purchases as soon as possible to avoid potential tariffs. That could lead to a surge in imports which mechanically would drag on second-quarter growth. Some of that might be offset by stronger consumer spending in the second quarter, followed by a slowdown in the third. Uncertainty for businesses will remain high, which could mean an extended pause in hiring and investment. Planned price increases due to tariffs may also be delayed.

In our base case, signs of a slowdown in growth in coming months will be clear enough to allow the Fed to cut rates by May or June, despite core inflation running above target. Fed officials will be willing to look through tariff-related inflation confined to goods and lean dovishly toward growth and employment. We aren’t making major changes to our macroeconomic forecast because of this latest news and continue to expect 125 basis points of Fed policy rate cuts this year.