Are More Interest Rate Cuts Ahead Now That Trump’s Tariff Policy Is More Clear?

As President Donald Trump unveiled new tariff policies this week, economists and traders upped their forecasts for interest rate cuts by the Federal Reserve.

However, Federal Reserve Chair Jerome Powell seems to be holding the “wait-and-see” line.

After the announcement of tariffs on Wednesday, the bulk of traders were expecting rate cuts this year. According to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data, traders were pricing in four rate cuts totaling one percentage point by the end of the year Friday morning. A number of economists also increased their forecasts for the Fed’s rate cuts, though there isn’t a strong consensus.

However, in a speech to journalists in Arlington, Va., on Friday, Powell reiterated his position that the central bank would wait to see how the new policies affect the economy. In their last meeting, members of the Fed’s policy comittee predicted that they would cut rates twice this year.

“It feels like we don’t need to be in a hurry,” Powell said Friday. “It’s not clear to me at this time what the appropriate path for monetary policy will be.”

After his comments, traders were still pricing in four quarter-point rate cuts before the end of the year, with the first one expected at the June policy committee meeting. Traders are pricing in just a 28% likelihood of a cut in early May, which is the next time the policy committee meets.

So far this year, the Federal Reserve has held its influential federal funds rate at a range of 4.25–4.50%. Powell and his policy-setting colleagues have said they are waiting to get more clarity on all policy changes, including tariffs, before making a big change to their trajectory.

However, economists said the tariffs announced this week could increase inflation and tip the economy toward a recession that would pressure jobs. If that were to happen, the Fed would be stuck between its dual mandate—to keep inflation low and employment high.

“The Fed is in a tough spot with inflation set to accelerate and the economy poised to slow,” wrote Nationwide Chief Economist Kathy Bostjancic. “If the economy falls harder into a recession, then the Fed might decide to look through a ‘transitory’ inflation rise and cut rates more aggressively.”

Powell acknowledged Friday that a period of high inflation and rising unemployment would pose a challenge for the Fed. The main tool at the Fed’s disposal to deal with either problem is the fed funds rate, which it would normally raise to quash inflation or lower to spur employment.