The market could be dead wrong on rate cuts if this scenario plays out

The Fed today is expected to keep interest rates steady at 4.25-4.50% and overall maintain a neutral stance given the uncertainty around tariffs and inflation expectations.

The market is pricing around 80 bps of easing by year-end
but Fed Chair Powell could push back against such dovish
expectations triggering a repricing to around 50 bps, which has been the Fed’s baseline for 2025.

There is a scenario though where the Fed doesn’t cut at all or delivers just one cut in 2025. The main factor for that scenario revolves around trade negotiations.

If we get something very positive, like much lower than expected reciprocal tariffs or even free trade deals, there will likely be a strong surge in demand. We’ve been hearing and seeing from the economic reports that business are cautious due to tariff uncertainty and that’s holding back activity. With a positive resolution, economic activity will pick up fast.

In this best case scenario, the Fed could be even more constrained because there will be upward pressure on inflation and the economic data will start to show a strong rebound in activity justifying a cautious approach to rate adjustments.

This is something to keep in mind because such changes offer great trading opportunities as the market readjusts to new conditions. Contingency planning is an essential part of a trader’s analysis.

This article was written by Giuseppe Dellamotta at www.forexlive.com.