Fed is in “no hurry” to lower rates. Don’t be surprised by multiple cuts.
Recession odds are rising as Trump’s tariffs sink bond yields, oil prices, and stocks. So, too, are the odds of multiple Federal Reserve interest-rate cuts.
President Donald Trump has already succeeded in two of his key economic goals, bringing down long-term interest rates and oil prices.
That has been accomplished via a crash in asset values brought about by perhaps the largest tax increase in modern U.S. history. These moves have made a recession an odds-on probability rather than an outlier before he took office in January.
In turn, that has sharply raised the likelihood that the Federal Reserve will be forced to lower its short-term policy interest rate, far more and far sooner than it had anticipated, despite inflation rising, rather than falling toward the central bank’s 2% target.
This follows the administration’s announcement this past week of much larger-than-expected reciprocal tariffs, which sent stock prices plunging in the U.S. and abroad. Economists calculate the tariffs would be equivalent to the biggest U.S. tax increase in over a half-century; that one led to the 1969-70 recession. Retaliatory tariffs set by other countries, notably China, exacerbated the economic risks and added to the slide in stocks.
Treasury yields have plunged as the bond market has begun to price in the likelihood of Fed rate cuts and an economy shifting into reverse. As the chart here shows, traders in the financial futures market have sharply boosted their expectation for the number of cuts in the federal-funds target rate to more than four from the current range of 4.25% to 4.50%. At the Fed’s most recent policy meeting in March, the median projection called for two cuts by December.
Trump posed on Friday on Truth Social, “This would be a PERFECT time for Fed Chairman Jerome Powell to cut Interest Rates."
Powell, speaking moments later to a group of financial journalists, said, “It feels we don’t need to be in a hurry" to change policy.
“Really?" one of his inquisitors responded.
“You have inflation that’s going to be moving up, and growth is going to be slowing. It’s not clear at his time what the appropriate path of monetary policy will be," Powell replied.
Along with tariffs, interest rates have been front and center in the administration’s economic priorities. Treasury Secretary Scott Bessent has declared that the benchmark 10-year Treasury yield, rather than the stock market, is the Trump administration’s target. By that criterion, it has been a resounding success; the benchmark yield plunged below 4% on Friday to the lowest level since early October, and is down sharply from over 4.75% in early January. The aim is to help Main Street rather than Wall Street by cutting other key borrowing costs, notably mortgage interest rates.
Oil prices also are down sharply, with benchmark crude futures plunging below $62 a barrel on Friday from a recent peak of $80 in late January, fulfilling another of the president’s aims. But oil companies are unlikely to “drill, baby, drill," given they need a $65 crude price to drill profitably, according to a Dallas Fed survey last month.
The twin goals of bringing down interest rates and energy prices have been accompanied by the painful drop in asset prices, especially stocks. We estimate $11.9 trillion has been lost since the market’s peak in February, and $7.6 trillion since last November’s election. This column had been optimistic that high asset prices would allow the wealthy, who account for the bulk of consumption, to keep spending and hold up the economy.
After last week’s decimation of many of portfolios, that is no longer certain. As former AllianceBernstein chief economist Joseph Carson pointed out, the 2001 and 2008-09 recessions were the result of asset-price plunges. But this episode is different in that it is the result of deliberate policy actions.
Those were described in a research note from J.P. Morgan’s influential economic policy team, led by Bruce Kasman, titled, “There will be blood." The tariffs announced this past week amounted to a tax increase equal to 2.4% of U.S. gross domestic product, on par with the 1968 tax hike, which equaled 2.6% of GDP. And the tariff rates were even higher than the Smoot-Hawley Tariff widely seen as making the Great Depression truly great.
The initial impact from the Trump tariffs will be to raise prices. While Powell termed the inflationary impact “transitory," the second-order effect is apt to hit growth and employment. As companies cope with higher costs they can’t pass through to customers, either other businesses or consumers, they will either accept shrinking profit margins or seek to cost cuts, mostly jobs.
The employment report released on Friday showed a robust labor market ahead of the tariffs, but that’s ancient history. Nonfarm payrolls rose by 228,000 in March, more than half-again consensus forecasts, although the two preceding months were revised down by 48,000. The headline unemployment rate ticked up, to 4.2% from 4.1%, which was because of an increased labor force, a good thing. The sacking of federal employees by DOGE has yet to show up in the data, however.
But looking ahead, J.P. Morgan sharply raised its estimate of the risk of a global recession to 60% this year, from 40% earlier. The effect of the U.S. tariffs will probably be exacerbated by retaliation (such as China’s imposition on Friday of a 34% charge on U.S. goods), the slide in U.S. business sentiment, and disruptions of supply chains.
Fed rate cuts may cushion some of those impacts but allow the higher prices from tariffs to stand. In other words, the worst of all possible worlds.
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