Market Starts to Doubt Fed Will Follow Through on Two Rate Cuts
The announcement of tariffs that Donald Trump intends to impose on China, Mexico, and Canada—though he secured a 30-day truce with the latter two—has disrupted expectations for global trade, inflation, and Federal Reserve (Fed) rate cuts this year.
The trade war, which could escalate in the coming months due to these tariffs, continues to evolve daily, with markets constantly recalibrating expectations and uncertainty becoming the norm. Perhaps the most complex issue is reassessing whether the Fed will proceed with rate cuts this year and, if so, how many.
While Richmond Fed President Tom Barkin stated that the Fed still leans toward further rate cuts this year, he also emphasized that “the uncertainty surrounding the impact of the Trump administration’s initiatives on tariffs, immigration, and regulations needs to be better understood.” Alongside tariffs, factors such as deregulation—its potential impact—immigration policies, energy policies, and geopolitical dynamics add to the prevailing uncertainty, Barkin noted.
It is worth highlighting that the U.S. central bank decided in January to maintain its interest rate policy unchanged while awaiting more data on employment and inflation, as well as the outcome of Trump’s policies, which remain difficult to predict.
Interest Rate Outlook and FOMC Decision
According to the CME FedWatch Tool, citing a report, the market still considers a 25-basis-point rate cut at the June 18 meeting the most likely scenario. However, it is now less certain whether the FOMC will implement another cut at its December 10 meeting.
The news of the tariff implementation overshadowed what was initially expected to be the most relevant development of recent days—the FOMC’s first meeting of the year on January 29. At that meeting, the FOMC validated market expectations by keeping its policy rate unchanged in the 4.25%-4.50% range, pausing the rate-cutting cycle after three consecutive reductions in previous meetings.
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