Wall Street expects the Fed to rescue the economy from Trump tariffs, but an emergency rate cut now could spark more panic, analyst warns
President Donald Trump’s aggressive tariffs have Wall Street increasingly expecting a recession and more easing from the Federal Reserve, but an analyst warned an emergency cut could set off more panic.
Economists at JPMorgan have
sharply downgraded their economic forecast for this year
due to the tariffs and now see GDP shrinking 0.3% instead of growing 1.3%.
At the same time, Trump administration officials and the president himself have shown
no signs of backing down
from their trade war, even as the stock-market selloff wipes out $6 trillion in market cap. On Monday, Trump doubled down on his message that Americans must endure some pain to achieve his goal of rebalancing trade relations.
“Don’t be Weak! Don’t be Stupid! Don’t be a PANICAN (A new party based on Weak and Stupid people!). Be Strong, Courageous, and Patient, and GREATNESS will be the result!” he wrote
on Truth Social
.
But the mood on Wall Street is so despondent that
CME’s Fedwatch tool
briefly priced in 125 basis points of rate cuts this year, before paring it back to 100 points, or the equivalent to four quarter-point cuts.
That’s up from views for three cuts last week and just two earlier this year, with some even predicting that
the Fed would hold off completely
in 2025.
According toBloomberg
, data on rate-swap contracts indicates investors also see nearly 40% odds the Fed will cut rates by 25 basis points next week—before the next scheduled meeting on May 7.
But Greg McBride, Bankrate’s chief financial analyst, warned that could cause more harm than good.
“Unless the functioning of financial markets, such as the flow of credit, begins to seize up, there isn’t much the Fed can do,” he wrote in a note Sunday night. “An emergency rate cut would do little and could fuel further panic. Any boost to sentiment could also be fleeting amid such uncertainty.”
Still, McBride acknowledged the stock market meltdown since Thursday is “unique, and is particularly unsettling,” but cautioned investors should resist the temptation for “knee-jerk” selling.
For his part, Fed Chairman Jerome Powell has signaled the central bank is in no rush to adjust monetary policy. That’s as the Fed must fight inflation, which would be fueled by tariffs, and support the job market.
On Friday, he said Trump’s tariffs were significantly steeper than expected and would likely
push inflation higher
and slow economic growth, striking a more hawkish tone after previously suggesting tariffs might have a more
transitory effect on inflation
.
“It feels like we don’t need to be in a hurry. It feels like we have time,” Powell said. “Inflation is going to be moving up, and growth is going to be slowing, but to me it’s not clear at this time what the appropriate path for monetary policy is going to be. We’re going to need to wait and see how this plays out before we make those adjustments.”
