Morgan Stanley chief economist Michael Gapen now expects just one Federal Reserve interest rate cut in 2025 versus a previous projection of two rate cuts, given the uncertainty of President Trump's recent tariff actions.
The brokerage firm had seen rate cuts in March and June. However, now they see just one cut in June.
"On-again-off-again tariff uncertainty should raise the hurdle for Fed cuts, and we now tentatively look for only one rate cut this year in June," Gapen stated.
Due to the levying of said tariffs at a much quicker rate than anticipated, it is expected that disinflation will stop at a higher rate of inflation, and any hopes of near-term rate cuts may be dashed in the process, the firm said.
"While the immediate worst case for markets may have passed, trade policy uncertainty remains high and, in our view, means the hurdle rate for Fed rate cuts has risen," they added.
Whether the tariffs are avoided or not, their potential elevates uncertainty about PCE inflation. This keeps risks of PCE inflation "tilted to the upside."
On Saturday, the U.S. shared that it would impose tariffs of 25% on both Mexico and Canada, while also threatening China with an incremental 10% tariff. Since both Mexico and Canada have agreed to terms and continued negotiation, the U.S. has delayed tariffs for another 30 days. Tariffs took effect for China on Tuesday, imposing their own tariffs on the U.S. sequentially.
Despite the dissipation of the looming anxiety from tariffs, Gapen cautioned of hesitancy, stating, "While the immediate worst case for markets may have passed, trade policy uncertainty remains high and, in our view, means the hurdle rate for Fed rate cuts has risen."