April 22, 2025
The initial reaction to the tariff wars has been a major retrenchment in the stock markets and extreme volatility for bonds as well. With many analysts using the word recession repeatedly, an important question has arisen — should the Federal Reserve step in and implement an “emergency” rate cut.” We say “emergency” because there is no regularly scheduled meeting of the Fed’s Open Market Committee until early May.
Indeed, a meeting took place less than a week after the sweeping tariff announcement was made. However, despite analysts expecting this action, the Fed opted to wait until more clarity arises from this policy initiative. Still, a sharp rate decrease is forecasted by many for their next scheduled meeting. So, will they — or won’t they? We understand that the Fed is focused upon the long-term effects of tariffs. For example, what if the tariff initiative leads to negotiations which then lead to the removal of many of the tariffs in the upcoming weeks?
On the other hand, what if the tariffs stay implemented and this leads to a recession and rising inflation? This phenomenon is otherwise known as stagflation. As of now, the Fed’s overriding goal is to contain inflation. But if a recession hits, the war against inflation could take a back seat. Remember that long-term interest rates don’t always follow the direction of the Fed’s control of short-term interest rates. If they act too impetuously to lower the Federal Funds Rate while inflation is rising, long-term rates could rise. Conversely, if they hold off, long-term rates such as mortgages could fall independent of Fed action. .
Source: Origination Pro
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