Donald Trump has called on the US Federal Reserve to lower interest rates in a post on social media platform X today. It comes after global markets continued to tank on the back of his punishing ‘Liberation Day’, which occurred last week.
The US president announced widespread tariffs on a host of countries on 2 April, with Europe hit with a 20% tariff, while some Asian countries were slapped with almost 50% charges.
Darius McDermott, managing director at Chelsea Financial Services, said the tariffs won’t just slow economic growth but they will also drive inflation higher.
“JP Morgan has already raised its US inflation forecast to 4.4% by year-end – more than double the Fed’s target,” he said.
“That leaves Powell walking a very fine line: if he cuts rates or restarts quantitative easing (QE) too soon, inflation could surge and damage the central banks' credibility. At the moment, interest rates are caught on a seesaw: inflation risks on one side, recession risks on the other.”
Rebekah McMillan, associate portfolio manager on the multi-asset desk at Neuberger Berman, said the Fed has a dual mandate of price stability and full employment and “can and will cut rates to support the US economy, in the face of a growth shock stemming from the tariff policies”. They may do this “sizably if needed”.
“If financial conditions continue to tighten from here that could be the trigger to deliver policy easing, though the bar for an inter-meeting cut is fairly high. We would likely need to see bonds start to sell off or credit spreads blow out,” she said.
Yet on Friday, Fed chair Jerome Powell said the central bank will not rush any policy moves. “It feels like we don't need to be in a hurry. We're going to have to wait and see how this plays out before we start to make adjustments,” he said.
Giles Parkinson, head of equities at TrinityBridge and manager of the Select Global Equity fund, agreed that tariffs will likely add to inflation and hurt underlying economic growth in the US, but said the Fed will continue to prioritise inflation in the short term as the US economy is still adding jobs and is not currently in recession.
The last time Trump waged a trade war with China in 2018, the Fed’s Tealbook (a report that members of the Fed’s Open Market Committee receive before every meeting) contained assumptions that the committee would look through price bumps, with the proviso that inflationary expectations were well anchored, he pointed. But all that changed in 2020.
“After the Covid surge, inflation expectations are anything but stable in the minds of consumers. Central banks will want to focus on the inflation aspect of their mandate until the economic side becomes undeniable,” Parkinson said.
Markets are pricing in five cuts over the next 12 months, with 50/50 odds of a cut at the next meeting in May, he said, adding that the Fed is “going to cut this year”. However, he warned: “The longer they leave it, the more dramatic it’ll be”.
Gerrit Smit, manager of the Stonehage Fleming Global Best Ideas Equity fund, was less concerned than his peers, however. Although consumer confidence and economic growth will likely be affected, employment and wages are not expected to be hit badly enough to drive economies into deep recessions.
Meanwhile, “tariffs may have some effect on inflation down the line, but with US inflation currently under control, we do not believe the Fed will cut its target rate imminently,” he said.
“We do expect interest rates to drift lower in sympathy with a softening outlook but the US economy is still supported by relatively healthy employment and wage growth, and the Fed can save its ammunition for later.”
The Bank of England has a “somewhat easier” calculation to make as “import taxes imposed by the US are negative for growth here at home and any potential retaliation by the UK will only have a small upward lift to domestic inflation”, he said.
McMillan agreed. “Market-wise, the UK is along for the ride with the rest of the world reflecting risk-off sentiment and concerns of global growth slowdown, though the direct impact to UK growth of tariffs appears relatively less severe, albeit clearly from a lower base,” she said.
A reduction in gilt yields could reduce the urgency and pressure for central bank action, with markets anticipating around two cuts this year. While the firm had expected more than the market at the start of 2025 (four this year and two in 2026), McMillan said she is now more in line with the market.
McDermott noted however that market consensus has shifted from expecting two cuts to three, while he is now pricing in around 87 basis points of cuts in the UK.
Laith Khalaf, head of investment analysis at AJ Bell, agreed that markets are now pricing in three cuts, taking the base rate to 3.75% by the end of 2025.
“The Bank of England will be keenly aware the inflationary outlook isn’t entirely one-sided. Cheaper oil will push down on UK inflation, giving the Bank of England scope to cut rates without worrying about rising prices. Likewise cheaper goods flowing into the UK instead of the US could help dampen inflation.
“However on the flip side of the coin, exchange rate movements could create inflationary headwinds. The immediate response to Trump’s tariffs was a sell-off in the dollar, but there has been a recovery and now the pound is trading at $1.28, below the level it stood at before Trump’s announcement.”
Additionally, the UK’s reaction to the tariffs matters. Should the UK impose its own tariffs on imported US goods, that could add to inflationary pressures, he concluded.