Trump Tariff Uncertainty Deters Fed Rate Cut

President Trump has repeatedly pressured Jerome Powell and the Federal Reserve to cut interest rates. However, the ongoing uncertainty surrounding tariffs may deter the Fed from taking such action. The Fed has cited the unknown impacts of ever-changing trade policies as a reason for holding rates steady.

Despite Trump's insistence, Powell has thus far refused to cut the base rate from its current level. Analysts suggest that this reluctance will continue due to the uncertainty surrounding the fundamentals of America’s economy. The Fed is mandated to keep inflation under control, and the inflationary impact of economic sanctions is not yet known.

The Fed may want to observe how consumers and businesses react to tariffs before lowering the base rate, as a lower rate could lead to increased economic activity and potentially push prices even higher. In the past week, Trump has done little to solidify America’s position on tariffs, pushing the deadline for deals back to August 1. The proposed levels of tariffs are also shifting seemingly day by day for nations that haven’t yet agreed to a deal with the U.S.

Overnight, Trump shared a series of letters sent to foreign governments setting out the sanctions they will face for not agreeing to a deal. Japan and South Korea now face a 25% hike on all goods, while Laos and Myanmar will face 40% duties.

Despite being hit hard by Trump’s trade rebalancing efforts, Asia stayed relatively flat in trading. The Nifty 50 and Nikkei 225 charted a meager boost, while the Hang Seng Index was up by more than a point. Europe also stayed relatively calm with London’s FTSE and Germany’s DAX marking minor gains.

UBS analyst Paul Donovan suggested that foreign markets no longer believe Trump’s threats, stating that it seems a wasted effort to analyze every Trump social media post when investors understandably anticipate future retreats.

The shifting tariff expectations will do little to convince Powell to cut. After sending the posts, the President signed an executive order that effectively delays the new tariff rates until August 1, prolonging the current 10% tariff rate and giving nations more time to meet the trade demands from the White House. The President continued to signal he was open to deals, saying the August 1st deadline was ‘not 100% firm’ and that they could ‘maybe adjust a little bit, depending.’

White House advisor Peter Navarro wrote that Chair Powell’s policy was causing American households ‘acute financial pain’ and that if Powell ‘will not voluntarily adjust course, the board must act decisively to prevent further economic harm.’ At face value, the latest tariff letters, and the fact that the deadlines seem to be pushing towards August 1st, thus prolonging uncertainty, means a September Fed cut will become more difficult unless there is strong evidence of a deteriorating economy.

Goldman Sachs last night upped its outlook on the S&P on all 3-, 6-, and 12-month forecasts, up by +3% (to 6400), +6% (to 6600), and +11% (to 6900) respectively. The equity team reasoned that earlier and deeper Fed easing and lower bond yields than previously expected, continued fundamental strength of the largest stocks, and investors’ willingness to look through likely near-term earnings weakness support their revised S&P 500 forward P/E forecast of 22x. Their previous index targets were 5900, 6100, and 6500, respectively.

Goldman Sachs’ economists’ revised Fed forecast calls for three sequential 25 basis point cuts this year, beginning in September, followed by an additional two quarterly cuts in 2026.