Written by: Luke, Mars Finance
On April 8, 2025, the global financial markets experienced severe turbulence due to the escalation of the U.S.-China trade war. The United States announced that, because China did not withdraw the 34% counter-tariffs by noon on Tuesday, it would impose an additional 50% tariff on Chinese goods starting April 9, raising the total tariff to 104%. This move is seen as a signal of economic decoupling, and the market’s optimistic sentiment in the early session quickly collapsed, with Bitcoin (BTC) retreating to 76,413 USDT after reaching a high of 81,243 USDT yesterday. Meanwhile, the Federal Reserve is scheduled to hold a closed-door meeting on April 7, sparking speculation about whether they are preparing for an emergency rate cut to address a potential crisis. This article will analyze the impact of the tariff escalation, the chain reaction of market dynamics, the historical lessons from past closed-door meetings of the Federal Reserve, and the possible current countermeasures.
- 104% Tariff Implementation: The Trade War Enters “Nuclear War” Mode
The Trump administration’s tariff policy towards China has been escalating: a 10% tariff was imposed starting in February, an additional 10% in March, a 34% increase last week, and now a further 50%, totaling 104%. Martin Chorzempa from the Peterson Institute for International Economics pointed out, “Such high tariffs mean that both sides may completely stop trade exchanges.” Trump called China the “largest trade predator” on social media, accusing it of imposing a 34% tariff during the “market collapse,” ignoring his warning not to retaliate.
Chinese Foreign Ministry spokesman Lin Jian responded: “There are no winners in a trade war, and protectionism will only drag down the global economy. China does not provoke, but will never back down, and will take all necessary measures to defend its rights and interests.” This tough statement shows that there is no room for compromise between the two sides. Analysts warn that if a trade war fully breaks out, the global supply chain will face severe impact, and the risk of economic recession will increase sharply.
The market reacted swiftly. U.S. stocks rose early on Tuesday due to hopes for negotiations, but after the White House confirmed that high tariffs would take effect immediately, the three major indexes plunged at the close. The Dow Jones fell 0.84% to 37645.59 points, the S&P 500 dropped 1.57% to 4982.77 points, and the Nasdaq fell 2.15% to 15267.91 points. Apple’s stock price dropped 5% at the close due to supply chain risks. Bitcoin fell back to 76413 USDT after a surge yesterday, down about 6%, highlighting rising risk aversion.
- Market Pressure: US Treasury Sell-off, Basis Trading Risks, and Recession Signals All Ringing
The escalation of tariffs has intensified instability in the financial markets. The U.S. Treasury market is the first to be affected, with Tuesday’s auction of $5.8 billion in three-year Treasury bonds facing weak demand, as the bid-to-cover ratio reached 20.7%, the highest since December 2023. The yield on the 10-year Treasury bond rose to 4.3%, accumulating an increase of nearly 30 basis points over two days. Vail Hartman of BMO Capital Markets stated, “The weak auction may heighten concerns about foreign investors withdrawing from U.S. Treasuries.”
The deleveraging of hedge funds further pushes up high risk. A Wall Street trader revealed: "Treasuries have lost their safe-haven appeal and the market is selling off across the board. CICC pointed out that since the Fed reduced its balance sheet in 2022, hedge funds have become the main buyers of U.S. bonds through basis trading, with a size of about $1 trillion and a leverage ratio of up to 50 to 100 times. This strategy relies on low volatility, and once market volatility intensifies, a wave of liquidations is inevitable. Tuesday’s unusual volatility in the spread between the 30-year swap rate and Treasury bonds is a reflection of this risk. Marlborough Investment Management’s James Athey warned: "This is reminiscent of the March 2020 basis trade crash. Citigroup’s Andrew Hollenhorst added: "The sell-off in high-quality assets could signal that systemic risk is imminent. ”
At the same time, the signals of recession are becoming increasingly alarming. On April 9, JPMorgan released a report stating that stocks closely related to the U.S. economy have priced in nearly 80% of the recession probability. Their market-based recession indicators show that the Russell 2000 index was the hardest hit in the recent sell-off, reflecting a recession probability as high as 79%. The corresponding probability for the S&P 500 index is 62%, and for basic metals, it is 68%, while the 5-year U.S. Treasury bond stands at 54%. In contrast, the investment-grade credit market appears unusually optimistic, pricing in only a 25% recession probability, down from zero last November. JPMorgan’s analysis points out that although funding pressures may intensify, the confidence of credit product investors has yet to waver, but the pessimistic sentiment in the stock and commodity markets is nearing a critical point. If tariff shocks further weaken corporate earnings, recession expectations could quickly become a reality.
The commodities market is also under pressure. The Bloomberg Commodity Index plunged during the day, with WTI crude oil falling below $60, and gold failing to rebound, indicating that recession expectations are dominating. If a liquidity crisis reoccurs, a market failure similar to that of 2020 may reappear.
III. A Historical Review of the Federal Reserve’s Closed-Door Meetings: Decision-Making Samples in Times of Crisis
The Federal Reserve will hold a closed-door meeting on April 7, with the theme “Review of Prepayment Rates and Discount Rates,” raising market speculation about whether it is preparing countermeasures for tariff impacts. The overnight interest rate swap market shows that investors expect a 125 basis point rate cut within the year, with a 40% probability of an emergency rate cut next week. However, San Francisco Fed President Mary Daly stated on Tuesday, “Current policy is sufficiently accommodative, and there is no need to act hastily due to short-term fluctuations.” She pointed out that the impact of tariffs on inflation is still unclear and depends on the implementation method, which contrasts with market expectations. The Fed’s closed-door meetings are typically held during times of significant economic uncertainty, and historical cases provide important references for the current situation.
The following is the background and results of several key closed-door meetings:
Closed-door meeting on October 7, 2008
Economic Background: During the peak of the global financial crisis, the bankruptcy of Lehman Brothers triggered market panic, the credit market froze, and the S&P 500 index fell nearly 17% that month.
Meeting content: Discuss urgent interest rate cuts and liquidity support plans, review discount rates to stabilize the banking system.
After the meeting measures: On October 8, the Federal Reserve, in conjunction with global central banks, lowered interest rates by 50 basis points to 1.5% and introduced several emergency lending tools, followed by a further reduction to 1% on October 29, laying the foundation for quantitative easing (QE).
Closed-door meeting on March 15, 2020
Economic Background: The global spread of the COVID-19 pandemic has led the United States to declare a state of emergency, with the stock market experiencing two circuit breakers within a week, the Dow Jones falling more than 20%, and liquidity in the U.S. Treasury market nearly drying up.
Meeting content: Assessing the impact of the pandemic on the economy, discussing the reduction of interest rates to zero and large-scale asset purchase programs.
Post-meeting measures: Announced a 100 basis point rate cut to 0-0.25% on the same day, initiated a $700 billion QE, and injected liquidity through the repo market, avoiding a complete collapse of the financial system.
Closed-door meeting on October 3, 2022
Economic background: Inflation soared to a 40-year high (core PCE over 6%), aggressive rate hikes by the Federal Reserve triggered market volatility, and the 10-year Treasury yield approached 4%.
Meeting Content: Review the feasibility of adjusting the discount rate and assess the impact of interest rate hikes on the economy.
Post-meeting measures: No immediate policy adjustments, but the November FOMC meeting continues to raise interest rates by 75 basis points to 3.75-4%, and hints at slowing the pace of rate increases, laying the groundwork for a policy shift in 2023.
These cases indicate that closed-door meetings often pave the way for significant policy adjustments, especially when the financial markets face systemic risks. For example, the meetings in 2008 and 2020 directly led to interest rate cuts and QE, while the 2022 meeting provided a buffer for subsequent policy tweaks. Currently, the potential supply chain disruptions and inflationary pressures caused by the 104% tariff bear similarities to past crises, but the unpredictability of Trump’s policies adds a new layer of complexity.
Summary
The implementation of a 104% tariff on China marks a new phase in the trade war, and global markets are facing severe tests. The rebound in U.S. stocks has been thwarted, the sell-off in U.S. bonds and basis trading risks have exposed the fragility of the financial system, and JPMorgan’s recession indicators are sounding the alarm, while Bitcoin’s volatility reflects shaken investor confidence. The results of the Federal Reserve’s closed-door meeting will be a key variable: will it secretly intervene to support the market, or wait for the storm to pass? History shows that decisive action during a crisis can often turn the situation around, but the current uncertainties far exceed those of the past.
Investors need to closely monitor liquidity indicators and the movements of the Federal Reserve. As Greg Peters from PGIM said: “The market is in a state of extreme unease, and any variable could trigger a huge shock.” In this chaotic battle, the outcome is uncertain, but the risks are imminent.
