Rate-cut bets are soaring as traders see rising recession odds
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- Traders see higher chances of interest rate cuts this year.
- Investors see a 100-basis point reduction by December, CME FedWatch Data shows.
- President Trump's latest tariffs have boosted recession outlooks.
Investors are bolstering bets that the Federal Reserve will have to slash interest rates this year as President Donald Trump's trade war amplifies growth fears.
Asset prices tanked on Thursday after the White House delivered a range of higher-than-expected tariffs on global trading partners, surprising analysts and triggering warnings about a deep and widespread downturn.
JPMorgan's chief US economist, Michael Feroli, said that the inflationary hit from Wednesday's announcement could weigh on US wallets, shrinking consumer spending in the next few quarters.
"This impact alone could take the economy perilously close to slipping into recession."
Traders are now more convinced that Fed officials will be forced to unwind high interest rates, a move done to revive economic activity.
According to the CME FedWatch Tool, the odds of a quarter-point cut in May jumped from 10.62% on Wednesday to 26% by Thursday morning.
While the majority still project the Fed to hold rates steady that month, expectations of cuts are also jumping for the rest of the year. By December, investors indicate that the fed funds rate will have dropped 100 basis points, compared to 75 basis points of cuts by year-end.
Before Trump announced his reciprocal tariffs, the Fed's March meeting penciled in two rate cuts for 2025, though Chairman Jerome Powell noted that the bank was in a wait-and-see mode regarding White House policy.
Alongside bearish commentary, market participants are also readying for a recession this year. Bettors on Kalshi project a 54% chance of a US downturn this year, up from 42.9% on Wednesday.
Still, at least one bank anticipates that the Trump tariffs could put the Fed on further pause. Morgan Stanley removed its outlook for a June cut, expecting no reduction to the fed funds rate this year.
"Our view is that the Fed will have trouble looking through the near-term impulse to inflation and ease quickly. This, of course, is contingent on the economy remaining in a modest growth environment," the bank wrote on Thursday.