If Trump Wants Powell to Cut Rates, He Needs to End the Tariff Uncertainty Now

President Donald Trump may find that tariffs and rate cuts don’t go hand in hand. (Getty Images)

Global investors have been trying to look past the current tariff confusion, triggered by a series of letters from President Donald Trump that set steep levies for U.S. trading partners starting as early as next month.

The S&P 500 fell by around 0.8% on Monday but is still hovering near record highs and is sitting on a three-month gain of about 25%. Stock futures contracts suggest a modestly firmer open Tuesday.

The market’s benchmark volatility gauge, the Cboe Group’s VIX index, has only risen by around 0.8% over the past five days and is currently near the lowest levels of the year.

A bigger, but oddly quieter, reaction, however, is taking place in the bond market, where Treasury yields are rising and investors are starting to alter their nascent bets on a near-term interest rate cut from the Federal Reserve.

Benchmark 10-year Treasury note yields were at 4.415% in trading Tuesday. That’s a near 20-basis-point increase from a week ago and effectively pegs the world’s most important interest rate at the highest level since mid-June.

A portion of that move is tied to the impact of the Republican tax-and-spending bill, which will add around $3.4 trillion to U.S. debt levels over the next 10 years. A stronger-than-expected jobs report for June also has been adding upward pressure on Treasury yields as investors see inflation pressures lingering in an otherwise steady economy.

The recent round of tariff uncertainty was adding more fuel to the bond market’s recent selloff and, by extension, pushing out bets on Fed rate cuts until later in the year.

The CME Group’s FedWatch tool suggests the odds of a reduction in July in the fed-funds rate, which currently sits at 4.375%, are now less than 5%.

Bets on a September cut are still solid, at 61%, but that’s down from around 73% just last week. Meanwhile, odds that the Fed won’t make any move at that policy meeting, which also will include fresh growth and inflation forecasts have risen more than fourfold, to around 36%.

Federal Reserve rate cuts are a key aspect of the president’s broader economic strategy as they lower government borrowing costs, boost consumer spending, and act as a tailwind for domestic stock performance.

Trump repeatedly has criticized Fed Chairman Jerome Powell for failing to mirror policy easing moves from central banks around the world. Powell, for his part, has long insisted that the Fed’s near-term rate forecasts are hamstrung by tariff uncertainty.

The levies are inherently inflationary, as by definition they increase domestic prices for key goods and services, but the constant changes in policy from the White House have made forecasting that impact next to impossible.

The current round of tariff threats could do more of the same.

Letters sent to 14 trading partners on Monday outlined baseline rates that were similar to those unveiled, and then paused, on April 2, but comments from the White House suggested some room for negotiation that ultimately could lead to a lower baseline.

Confusion as to whether sector-specific levies “stack” onto the new tariff levels, as well as threats from the president if any nation raises its own rates in retaliation, complicates that task even further.

Henry Allen, macro strategist at Deutsche Bank, said that while tariff inflation pressures have been muted, summer consumer prices data could indicate a more visible impact.

Paired with strength in the labor market, the Fed would be even more reluctant to lower interest rates, he argued.

“This is important because markets are still pricing in two Fed rate cuts by year-end,” he said. “If those didn’t materialize, that would generate a market reaction.”

If President Trump wants to avoid that risk and get the Fed rate cuts he’s been pushing so hard for, he’ll need to end the tariff uncertainty quickly.

Write to Martin Baccardax at martin.baccardax@barrons.com