Could the Fed cut rates amid tariff-driven inflation? A closer look at asset managers

Published on April 16, 2025 by Nuwan Jayawardana CFA

“Liberation Day” tariffs in April 2025 mark a further step in the structural shift in US trade policy and reshape the Federal Reserve’s (Fed’s) near-term decision space.

With a 10% universal tariff on most imports and reciprocal tariffs as high as 54% of nations such as China, the US administration has reignited the pressure of the impact of tariffs on inflation  that were just beginning to cool. For asset managers, the base case is clear: a sustained higher interest rate environment is here, at least for now.

The Fed’s inflation-fighting mandate all but demands that policy rates remain elevated, as cost-push inflation from tariffs drives up consumer and producer prices. Recent commentary from Fed officials – including Chair Powell – has flagged the inflationary effects of the new tariffs, with concerns that trade policy could prolong price pressure and delay disinflation. This reinforces the view that monetary easing is unlikely in the near term. This reinforces the view that Fed rate cuts remain unlikely, with monetary easing not expected in the near term

But what if the unexpected happens?

The case for a Fed pivot: when rate cuts come into play

Despite the hawkish tone, asset managers should watch for emerging macro conditions that could force the Fed to prioritise growth and employment over price stability. Three scenarios are worth monitoring:

1. Stalling growth, rising job losses

If tariff-driven supply shocks squeeze corporate margins and slow investments, GDP growth could dip below 1%. A moderate uptick in unemployment (above 5%) could trigger a rebalancing towards the Fed’s dual mandate. This reflects the broader impact of tariffs on inflation and economic growth. . A moderate uptick in unemployment (above 5%) could trigger a rebalancing towards the Fed’s dual mandate.

2. Inflation begins to moderate

A stronger USD, import rerouting and demand destruction may combine to ease inflation pressure by late 2025. If headline CPI falls back towards 2.5% with stable expectations, the Fed could rebalance.

3. Global demand shocks

Retaliatory tariffs and slower global trade could weigh on exports and financial markets. The impact of tariffs on inflation may intensify economic pressures. This could amplify recessionary risks and push the Fed to provide monetary cushioning, especially if fiscal tools prove to be politically constrained.

What this means for portfolios

• Fixed income managers should prepare for curve steepening if fed rate cuts are priced in during a growth scare

• Equity managers may find tactical upside in rate-sensitive sectors (tech, real estate) if easing signals emerge

• Currency strategies should watch for USD strength reversal if the Fed moves more aggressively than global peers

The bottom line

The most likely Fed path after “Liberation Day” is a pause or further hikes as cost-push inflation plays out. However, a pivot to fed rate cuts is plausible – and potentially swift – if the tariffs do more economic damage than anticipated. Asset managers should remain flexible and scenario-ready. In this regime, policy is the macro, and the macro is the market.

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