On Monday, many economists proposed a growth forecast for China, and some raised their U.S. views, even as Beijing’s expected stimulus is likely to be lower now.

Of course, regardless of U.S. import tariffs are ultimately reached, they will be much higher than before President Donald Trump came to power, which may still be the highest in nearly a century. But relative to expectations - recently on Friday, Trump raised tariffs on Chinese goods - announced figures and a 90-day pause were clearly positive for risky appetite.

The enthusiasm is based on three broad factors - agreed tariff levels, the willingness of the two countries to continue to speak and the signals it sends about the settlement approach to Washington negotiates with other countries.

"China's tariff probation is a game changer for tactical risks," said Stuart Kaiser of Citi. "Obviously there are still a lot of policy and economic risks, but we don't see any reason to hinder the way of systematic purchases."

System Purchase is the name of Monday’s game. Both the S&P 500 and the Nasdaq smashed on the 200-day moving average, shutting down the technical level of viewing for the first time since late March. It turns out this is a false dawn - will this time be different?

In the United States - The melting of Sino trade tensions was not the only reason for investors' optimism on Monday - global geopolitical tensions also appear to be cooling down in multiple ways.

Ukrainian President Volodymyr Zelenskiy said he was willing to hold talks with his Russian counterpart Vladimir Putin in Istanbul later this week, and a meeting held by Trump on Monday said he was willing to attend.

The ceasefire agreed by India and Pakistan on Saturday appears to be taking place, Hamas released American hostages on Monday, and the Kurdistan Workers' Party (PKK) militant groups have been in bloody conflict with Turkey for more than forty years and are disbanding and ending the armed struggle.

Therefore, signs of a ceasefire in a global trade war and a sign of a downgrade in a real military conflict. The reason why investors were relieved and even cheerful.

Fed tests “waiting and seeing” restrictions

Differences are emerging as the Federal Reserve and other major central banks try to assess the economic impact of a rapidly shifting global trade war.

Fed has maintained interest rates in the face of rising inflation risks, while many of its peers are mitigating the impact of an imminent slowdown in growth.

The Fed's cautious stance risked leaving the chair Jerome Powell and the team again behind the curve.

The gap between the Fed and the European Central Bank's respective policy rates was the highest in more than two years, thanks to last week's decision to keep interest rates unchanged. Since 1997, interest rates in the United States have not been higher than those in Canada.

Powell said last week that he and his colleagues have the ability to maintain the patient’s policy stance because, on the surface, the U.S. economy is still in good shape. Growth and labor markets are strong, with inflation fairly close to its 2% target.

After the Fed remained unchanged, he told reporters that the waiting fee was "quite low". "We can move quickly when appropriate. But there is too much uncertainty...I really can't give you a time frame."

The inference here is that any economic damage to its mitigation cycle is delayed - remember that between August and December last year, the Fed lowered 100 basis points - and more aggressive moves will neutralize later.

That might be wishful thinking.

Moody's chief economist Mark Zandi said that while Powell's "hard" economic data such as unemployment and retail sales are still fairly healthy, now "emotional surveys" such as "soft" data are "around dark." Confidence has a direct impact on consumer, business and investor spending.

It's hard to predict exactly how powerful this connection is now, because it has weakened since the pandemic. But potential growth may have cooled meaningfully when the Fed finds a serious deterioration in the “hard” data, meaning it may be too late to prevent recession.

Export inflation

To be fair, the cautious American stance that Powell observed through the inflation lens would be more reasonable.

As consumers later this year, inflation expectations in the U.S. are significantly higher than inflation rates elsewhere due to import tariffs. In Monday's news, those expectations could change as U.S. smart trade tensions have greatly reduced escalation.

But even if a trade agreement is reached, the average effective tariffs in the United States will remain the highest in decades. More than 75% of the companies surveyed by the Fed said they would raise costs with consumers.

And, if the U.S.-China ceasefire doesn't work, Beijing will almost certainly redirect the shipping of cheap goods that were previously bound to other parts of the United States. All others are equal, which will put upward pressure on inflation in the United States while putting downward pressure on other advanced economies. This may largely explain the Fed's position of being more cautious and responsive.

"Overconsistent"

“The Fed suffers from too many consistent diseases,” said Willem Buiter, a former interest rate setter for the Bank of England. He believes that there is a trend of "over-graduate" among central banks. He said if policymakers know their ultimate goal, they should get there as soon as possible and without causing unnecessary volatility in financial markets.

The trouble is that the Fed has no idea about the ultimate goal, as Trump's trade war creates a fog of uncertainty. Powell declined to say that he and his colleagues think either of the Fed’s dual tasks of employment and inflation see greater risks to the economy.

Even at its best, policymaking is an uncertain science, vulnerable to changes in Milton Friedman's "long and variable" lag.

“You’re never right and right – you’re either too fast or too slow,” said Steve Dean, chief investment officer at Compound Planning.

Investors don’t seem to be worried about policy stagnation right now, especially given the growing positive news from the trade war front in recent weeks. Wall Street recovered completely immediately after April 2.

And if the fog of the trade war disappears, the Fed will be in a better position, perhaps justifying Powell’s approach to “waiting and seeing”. But we may have to wait another 90 days to find out.

Can the market be transferred tomorrow?

*UK Employment (March) * BOE Governor Andrew Bailey, Chief Economist Huw Pill Speakat Independence Event *German ZEW Business Sentiment (May) *U.S. CPI Inflation (April)

The opinions expressed are the opinions of the author. They did not reflect the views of Reuters News, which is committed to integrity, independence and freedom from prejudice under the principle of trust.

(Edited by Jamie McGeever, Nia Williams)