Fed Watchers Now See Rate Cuts This Year as Tariffs Hit Economy

President Donald Trump said late Thursday that the U.S. would put 5% duties on all Mexican imports on June 10, rising in increments to 25% in October, unless Mexico halts "illegal migrants" heading to the U.S. Stocks fell on the news and investors increased bets that the central bank would ease policy this year.

Fed Vice Chairman Richard Clarida said on Thursday, before Trump's announcement, that the central bank would be prepared to ease policy if it saw mounting risks to the U.S. economic expansion.

Feroli said the Fed "may well need to cut by much more than 50 basis points'' if the tariffs on Mexico are raised to 25%. Gapen wrote that "earlier action is not out of the question, in our view, if financial conditions deteriorate rapidly," a view echoed at NatWest by chief U.S. economist Michelle Girard.

Meyer, in a note to clients on Thursday before Trump's tariff announcement, predicted the Fed would reduce rates this year.

"We don't think the sky is falling," said Meyer, who heads Monetary Policy Analytics in Washington. "Rather, we think that by September the argument will prevail that, after a long period of patience, a 25-basis-point rate cut would represent a prudent recalibration of monetary policy."

Meyer listed a sharper-than-expected slowdown in growth, tighter financial conditions, and weak core inflation as reasons why the Fed will "soon become impatient."

Copyright 2021 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.