Donald Trump's reciprocal tariffs create fresh confusion for the US Fed

Global market participants, who were waiting for interest rate cuts from the US Federal Reserve, may have to review their expectations after President Donald Trump increased the weighted average tariff rate in the US to 29%, according to one estimate, which would be the highest since the late 1800s . Initially, markets had anticipated two interest rate cuts totaling 50 basis points in 2025. However, with the new tariffs are likely to push inflation higher, which would make it tougher for Fed Chair Jerome Powell to cut interest rates.

On the other hand, tariffs may also slow down economic growth — with many experts projecting higher odds of a US recession in 2025 — putting Powell in a bind while deciding the next step in monetary policy. “The consequences of inflation will be felt, and that presents a dilemma for the Federal Reserve now, even though Chairman Powell has said that inflation from tariffs would be transitory,” Cardillo told Reuters. Michael O’Rourke, Chief Market Strategist at Jones Trading Institutional Services, echoed similar concerns.



“That should slow trade and raise prices, squeezing profit margins. This will further slow a decelerating economy as it creates friction and distortion in global trade. I think we need to expect retaliation, which will likely lead to further escalation,” he told Bloomberg.

Prior to the tariff announcement, traders had largely priced in Fed rate cuts later in the year. According to the CME FedWatch Tool, the probability of a rate cut at the Fed’s July meeting stood at 89.3%, rising to 95.

7% in September and nearly 99% by December. However, the latest developments have introduced new uncertainties. The Federal Open Market Committee (FOMC) is set to meet in 34 days, and Powell will now have to weigh the risk of inflation against the possibility of a slowing economy.

In its March meeting , the Fed had projected economic growth of 1.7% for 2025, a downward revision from December’s estimate, while inflation expectations were raised to 2.8%.

Also Read: Trump throws half a punch: 26% reciprocal tariff on imports from India.