Central bank may make unplanned move amid surging recession fears – and it’s set to cut rates by more than expected before the end of 2025
Traders are now expecting the Federal Reserve to reduce interest rates five times in 2025 – and odds of an emergency cut are also surging as President Trump’s tariffs continue to roil global financial markets and stir speculation about an impending recession.
Prior to Trump’s announcement of a wave of tariffs on global trading partners in the Rose Garden last Wednesday, the central bank was expected to trim rates just twice before the end of this year.
But overnight interest rate swaps showed markets are now expecting rates to fall by 125 basis points before 2026, with odds of an emergency 25-basis-point cut next week jumping to 40% even though the Fed isn’t scheduled to make its next policy decision until May 7.
Analysts suggest a US recession could be on the way this year
Trump’s move, which saw the US slap a “baseline” 10% tariff on all countries – and steeper levies on many key trading partners – sent markets into a steep decline and sparked a huge selloff on Wall Street, with the president’s intransigence at the weekend doing little to calm fears of a sharp and prolonged economic downturn.
Speaking with reporters on Sunday, Trump appeared in no mood to back down on what’s become a signature policy, stressing the need to “forget markets for a second” and dismissing the prospect of a climbdown on tariffs.
The 10-year US Treasury yield, which strongly influences mortgage rates, slipped below 4% last week as investors abandoned stocks and flooded into the bond market amid rising recession fears.
Goldman Sachs says the risks of a downturn are still rising. Last week, the investment banking giant said those odds had jumped to 40%, up from 21%, because of the new US trade policy – and it now sees a 45% chance of the US sliding into recession.
JPMorgan Chase, meanwhile, now believes the economy will see recession this year, and expects the Fed to cut rates at every announcement between June and January.
Trump-Powell war of words on rate cuts continues
That’s despite the seeming reluctance of Fed chair Jerome Powell to countenance imminent rate cuts last week. In a speech in Arlington, VA, Powell highlighted the upside risk to inflation posed by Trump’s trade war and suggested the central bank was still in no hurry to bring rates lower.
But Trump, who has frequently called for the Fed to trim rates, once again demanded a reduction and said now would be the “perfect” time to cut.
Stay updated with the freshest mortgage news. Get exclusive interviews, breaking news, and industry events in your inbox, and always be the first to know by subscribing to our FREE daily newsletter.
