President Donald Trump’s tariffs are fueling recession concerns in the US while the Fed‘s rate cut expectations are on the rise amid uncertainties.
Trump’s reciprocal tariffs, announced April 2, are expected to go into effect this week, giving rise to inflation concerns, while US inflation remains above the Fed’s target.
Risks that tariffs could spike inflation and hamper economic growth made the Fed’s job more difficult to maintain a balance in its monetary policy.
Fed Chair Jerome Powell said tariffs can raise inflation and slow growth but it is too early to determine the appropriate course of action for the bank.
The Fed adopted a cautious stance for four years, cutting rates for the first time since the coronavirus pandemic last September by 50 basis points. The bank also cut rates in November and December by 25 basis points each but suspended rate cuts in January and kept its rates unchanged in March at 4.25% to 4.50%.
The Fed had left its 2026, 2027 and long-term estimates for the federal funds rate unchanged at 3.4%, 3.1% and 3%, respectively, which signaled two rate cuts for this year.
Meanwhile, the bank still needs obvious evidence of a weakening in the economy to cut rates again and it is unlikely that the Fed will cut rates to prevent a possible economic slowdown until the labor market is weakened enough, analysts said.
Last week, the US non-farm payrolls rose to 228,000 in March, above estimates, while the unemployment rate ticked up from 4.1% to 4.2%. Trump urged Powell to lower rates, saying it is the “perfect” time and to stop “playing politics,” in a post on Truth Social.
Wall Street economists upwardly revised inflation estimates and the recession possibility after reciprocal tariffs were announced, which fueled the projections that the Fed may start cutting rates as early as June or even May.
The possibility of the Fed cutting rates at its May meeting rose above 30% from 14% a week ago, according to the CME Group. The Fed is likely to cut its policy rate to 3.25% from 3.5% by the end of the year, meaning a four-quarter-point rate cut.
DECLINE IN INFLATION ESTIMATES MAY POINT TO ‘MACRO MALAISE’
Padhraic Garvey, regional head of research of the Americas at ING, told Anadolu in an email that Trump’s “so-called ‘liberation day’ caused many and varied market reactions,” but the most significant of which was the “virtual collapse in equity valuations.”
“While understandable, this was a tad strange, as the tariff announcements were not that deviant from what was expected,” he noted. “The 10% baseline was one that Donald Trump campaigned on, and 60% on China was another, and reciprocal tariffs were an overlay on top of that, much of which panned out as could be anticipated from existing trade deficits. So why the collapse?”
“The only logical rationale is a belated downsizing to future earnings, with structural implications; in that sense, this is bad,” he said.
Garvey stated that the tariffs put upward pressure on prices, “so, surely inflation breakevens should have shot higher,” he said.
He noted that the decline in market inflation estimates has good and bad aspects.
“The good is that it perhaps allows room for the Federal Reserve to cut quicker should the macro economy weaken in the coming months,” he said. “The bad is it begins to paint a picture of macro malaise—it’s too early to make that call but we can’t ignore what we are seeing.”
Garvey said the feared price increases stemming from the tariffs will turn into a permanent inflation trend, meaning the Fed may not be able to lower rates as much as desired.
“In this scenario, the Fed gets the funds rate to neutral when in fact they would prefer to push it through neutral,” he said. “Here, downward pressure is placed on the 10-Year (bond).”