Traders Expect Full-Point Fed Rate Cut Amidst Signs of Slowing U.S. Economy

Markets are increasingly betting that the U.S. Federal Reserve will cut its benchmark interest rate by a full percentage point before the end of the year, as signs of economic slowdown become more pronounced.

Though the Fed is unlikely to react immediately to the recent dip in U.S. GDP, expectations are mounting that by June, a more evident weakening of economic activity will push central bankers toward resuming rate reductions.

Last week, the Commerce Department’s Bureau of Economic Analysis reported that the U.S. economy contracted by an annualized 0.3 per cent in the first quarter. This unexpected downturn was largely attributed to American businesses accelerating imports in anticipation of President Donald Trump’s sweeping tariffs, which are set to take full effect in July.

Consumer spending, a key engine of the economy, also decelerated sharply, falling to a 1.8 per cent pace compared to 4 per cent in the previous quarter.

According to analysts at Pantheon Macroeconomics, the report signaled broader economic softness. “The report contained clear signs that the economy already was fundamentally slowing,” Pantheon economists wrote. They warned of bleak prospects should trade tensions persist: “A period of stagnation now likely lies ahead if the current set of tariffs is maintained, with recession the most likely outcome if the additional reciprocal tariffs are imposed in full in July.”

Investor sentiment reflected these concerns, with futures contracts tied to the Fed’s policy rate continuing to price in a start to interest rate cuts in June. Traders anticipate four quarter-point reductions throughout the rest of the year, which would bring the policy rate down to a range between 3.25 per cent and 3.5 per cent.

Despite growing market expectations, the Fed is not expected to act at its upcoming policy meeting. Central bankers are forecast to keep the federal funds rate in its current range of 4.25 per cent to 4.5 per cent. Fed officials have signaled caution, citing a challenging economic landscape marked by inflationary pressures from tariffs and a potential slowdown in the labor market.

“Central bankers say they expect the tariffs to boost prices and slow the labor market, a difficult mix because the Fed can’t fight both problems at the same time,” the article noted, encapsulating the dilemma facing monetary policymakers. As the dual threat of inflation and stagnation looms, how the Fed navigates this balancing act will become clearer in the months ahead. 

By fLEXI tEAM