How Tariffs Could Impact Economic Growth

How Tariffs Could Impact Economic Growth

Fed Official Revises Interest Rate Cut Forecast for 2025

Inflation remains the key factor influencing interest rate decisions.

The Federal Reserve consistently emphasizes its dual mandate when making interest rate decisions. Established in 1977, this mandate requires the Fed to:

• Promote maximum employment
• Maintain stable prices and moderate long-term interest rates

Challenges in Meeting the Fed’s Mandate

Achieving these goals is no simple task. The economy faces numerous challenges, including inflation spikes, financial crises, wars requiring significant funding, and pandemics that can halt economic activity.

During times of crisis, the Fed has stepped in to stabilize the economy. It played a crucial role during the 2008-2009 financial crisis and ensured economic continuity during the Covid-19 pandemic.

The Fed’s Response to Inflation and Interest Rates

In response to soaring inflation that reached 9% in early 2022, the Fed aggressively raised interest rates. After peaking in 2024, rates began to decline, with the most recent cut occurring in December. However, no further reductions have been made since then.

Market Reactions to Tariff Concerns

This week, investor concerns over potential tariffs from the Trump administration on imports from Mexico, Canada, and China, along with significant federal workforce job cuts, led to market turmoil.

• The S&P 500 dropped 4.6% in four days.
• The Nasdaq Composite fell 7.5% and is down 10% from its record high on Dec. 16, signaling a correction.
• Major stocks like Nvidia (NVDA), Tesla (TSLA), and Broadcom (AVGO) saw losses exceeding 10%.
• Tesla has fallen 40% from its 52-week high of $488.54, reached Dec. 18.

While the situation has caused concern, the Trump administration’s decision to delay some tariffs by a month has helped mitigate losses.

Fed Official Signals Potential Rate Cuts

Federal Reserve Governor Christopher Waller reassured markets that the Fed remains committed to lowering short-term interest rates. The current Federal Funds Rate stands at 4.25%-4.5%, down from a peak of 5.25%-5.5% in 2024.

High interest rates have contributed to mortgage rates hovering around 7%, dampening home sales. However, Waller suggested that as inflation nears the Fed’s 2% target—currently just under 3%—rate cuts could be on the horizon.

At the Wall Street Journal’s CFO Summit in New York, Waller described these as “good-news rate cuts.” While a rate cut at the Fed’s upcoming March 18-19 meeting is unlikely, reductions later in the year are increasingly probable.

Market Expectations for Future Rate Cuts

Investor sentiment has shifted significantly in recent weeks. According to CME Group’s FedWatch tool:

• No rate changes are expected in March or May.
• A cut may occur at the Fed’s June 17-18 meeting.
• Additional cuts could follow in July and the fall.

Just weeks ago, many believed there would be no rate cuts at all in 2025.

Powell’s Upcoming Address

Fed Chairman Jerome Powell is expected to provide further insights into monetary policy at the University of Chicago Booth School of Business’s 2025 U.S. Monetary Policy Forum. His comments will be closely watched, especially following the Labor Department’s February jobs report, which projects an unemployment rate of 4% and 160,000 new non-farm payroll jobs.

A separate report from Challenger, Gray & Christmas estimated 172,017 job cuts in February—an increase of 245% from a year ago.

As markets react to economic data and Fed policy signals, investors will be looking for reassurance that the central bank remains responsive to economic shifts while maintaining stability.

How Tariffs Could Impact Economic Growth.How Tariffs Could Impact Economic Growth.