TLDR:
- Investors are increasingly betting on aggressive Fed rate cuts due to Trump’s tariffs and recession fears
- Derivatives markets now imply a 44% chance of a Fed rate cut at the May 6-7 meeting, up from 14% a week ago
- JPMorgan economists have downgraded their economic forecast, now predicting GDP will shrink 0.3% this year
- Some analysts warn an emergency rate cut could cause more panic than it solves
- Market participants are pricing in the possibility of an emergency cut before the scheduled May meeting
President Donald Trump’s recently announced aggressive tariff policies have sparked fears of recession and market turmoil, leading investors to dramatically increase their bets on Federal Reserve interest rate cuts.
The U.S. stock market has shed over $5 trillion in value in just days following the tariff announcement, creating a climate of economic uncertainty.
Derivatives markets now imply a 44% chance that the Fed will cut rates at its next meeting on May 6-7, a steep increase from just 14% a week ago. Market prices suggest it is more likely than not that the Fed will reduce its key rate to a range of 3.25% to 3.5% or lower by year-end.
This shift represents at least four quarter-point reductions, according to CME Group data. Just one week earlier, market prices implied a 50%-plus chance of only three quarter-point cuts this year.
The dramatic market reaction has led to speculation about the possibility of emergency action. Some market data indicates investors see nearly 40% odds the Fed will cut rates before the next scheduled meeting on May 7.
Market Volatility and Economic Outlook
JPMorgan economists have sharply downgraded their economic forecast for this year due to the tariffs. They now predict GDP will shrink by 0.3% instead of growing 1.3% as previously forecast.
The market selloff has been severe enough that Bob Michele, Global Head of Fixed Income at JPMorgan Asset Management, compared it to historical crises—the 1987 stock market crash, the 2008 financial crisis, and the 2020 COVID-19 market downturn. In those previous crises, the Fed acted quickly with rate cuts.
“I don’t know if they can even make it to the May meeting before they start bringing rates down,”
Michele told Bloomberg Surveillance. He expressed doubt that the central bank could wait until its upcoming meeting to begin lowering rates.
Michele also warned that vulnerable companies already struggling with debt now face higher borrowing costs, lower sales, and higher expenses. “This is a serious moment. I do not think the Fed can just sit on the side,” he added.
Fed’s Cautious Stance
Despite market pressure, Fed Chair Jerome Powell has signaled the central bank is not rushing to adjust monetary policy. Speaking last Friday, Powell said Trump’s tariffs were steeper than expected and would likely push inflation higher and slow economic growth.
“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.”
The Fed faces a complex challenge. On one hand, it must fight inflation, which would be fueled by tariffs. On the other hand, it needs to support the job market and prevent recession.
The prospect that tariffs could drive up prices will likely make the central bank more hesitant to ease aggressively. Powell struck a more hawkish tone after previously suggesting tariffs might have a more transitory effect on inflation.
Trump has publicly urged Powell to cut rates, making his case on Truth Social. The president has persistently advocated for lower interest rates, stating in January that better monetary policy was needed to support the economy.
More recently, Trump has encouraged the central bank to reduce rates to ease the economic transition to his tariff policies. He stated it was a “perfect time” for the Fed to lower rates ahead of Powell’s speech last week.
Potential Risks of Emergency Action
Some analysts caution that emergency measures might backfire. Greg McBride, Bankrate’s chief financial analyst, warned that an emergency rate cut 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,” McBride wrote in a note. “An emergency rate cut would do little and could fuel further panic. Any boost to sentiment could also be fleeting amid such uncertainty.”
Despite these concerns, market pressure for action continues to build. The CME FedWatch Tool shows a 34% chance that the Fed will lower rates at its May meeting, though the majority of market participants still view a June rate cut as more likely, with odds of around 98%.
Traders are also pricing that the Fed will adjust rates at the November and December 2025 meetings, reflecting expectations of continued economic challenges throughout the year.
