Trump tariffs spark concerns of recession and inflation, Fed likely to cut interest rates more

From Morningstar: 2025-04-07 04:36:00

The Trump administration’s new tariffs spark concerns of a recession and potential inflation. Analysts predict the Fed may cut interest rates more than expected to support the economy, with bond futures markets pricing in a higher chance of rate cuts this year.

As markets react to the tariff plan, investors anticipate the Fed to act swiftly. Despite short-term inflation worries, the Fed may prioritize economic growth by lowering interest rates. Fed Chair Powell emphasizes a cautious approach, but experts believe a tariff-induced downturn could prompt rate cuts.

Treasury yields drop as investors fear slowing growth more than inflation from tariffs. The bond futures market predicts an 85% chance of over three rate cuts this year, up from previous expectations. If the Fed cuts four times, it could bring the target federal-funds rate down by 2%.

Traders now see a 30% chance of a rate cut at the May meeting, with June being the most likely. The Fed faces a dilemma of supporting economic activity while combating inflation, especially with the new tariff developments. Fed Chair Powell acknowledges the challenges and emphasizes a patient approach to policy decisions.



Read more at Morningstar: What Do the New Trump Tariffs Mean for US Fed…