Fed officials are still concerned about tariff risks, although traders now expect fewer rate reductions this year
Traders pared back expectations for Federal Reserve rate cuts after the US and China agreed a 90-day pause on tariffs – but Fed officials still sounded downbeat on the economic outlook despite the deal.
While stock markets and the greenback surged after a joint Monday morning statement from the superpowers in Geneva, Fed decisionmakers continued to highlight the threat of a spike in inflation and lower-than-expected economic growth because wide-ranging tariffs are still in place.
Governor Adriana Kugler suggested she’s prepared to keep the idea of a rate cut in play if the economy groans under the weight of tariffs in the months ahead.
“With inflation and employment potentially moving in opposite directions down the road, I will closely monitor developments as I consider the future path of policy,” Kugler said in remarks prepared for a Dublin speech, noting that tariffs between the US and China remain “pretty high.”
The agreement will see US levies on Chinese imports trimmed to 30% by Wednesday, down from 145%, and China will reduce its own charges on US goods from 125% to 10%.
Kugler appeared to indicate the Fed will still need to ease rates, although potentially by lower than originally thought.
“My basic outlook, in some sense, may have changed in terms of the extent to which we need to use our tools, the magnitude, but not in the direction,” she said.
Expect Fed cuts in 2025 – just fewer
Traders expect rate cuts are still on the way but only anticipate two reductions this year by a cumulative 56 basis points, with the first cut slated to arrive in September. Last week, they expected the Fed to cut by nearly 75 basis points before the end of 2025.
The tariff pause “dramatically” reduces chances of the US sliding into recession, according to Piper Sandler chief global economist Nancy Lazar.
That could rally consumer confidence and inject some optimism into the housing market – but the 10-year Treasury yield, a key influence in the direction of US mortgage rates, inched upwards on the back of the news.
Mortgage rates have hovered stubbornly above 6.5% throughout the year to date, and the latest trade war developments look unlikely to buck that trend.
Mortgage rates could face upward pressure after the 10-year Treasury yield jumped Monday, following a US-China deal to pause tariffs that cooled expectations for Federal Reserve interest rate cuts. https://t.co/aPBgkZLWbF
— Mortgage Professional America Magazine (@MPAMagazineUS) May 12, 2025
How will the US-China agreement impact the mortgage market?
For mortgage market watchers, the US-China agreement is just the latest twist in a turbulent year that’s kept plenty of would-be homebuyers on the sidelines as they await clarity on the outcome of the tariff turmoil.
Advising clients amid the volatility has been no easy feat for mortgage brokers. “When [the US-China trade war] initially happened, the stock market was down a few thousand points and now it’s basically up more than it went down,” Brian Scott Cohen (pictured below), senior loan officer at Guaranteed Rate Affinity, told Mortgage Professional America. “It was a very short-lived conversation.
“Right now, the stock market is up a thousand points – and, unfortunately, the 10-year Treasury is at 4.45%, the highest it’s been in quite some time. But once we think rates are coming down and there’s some turbulence in the market… it seems that things get worked out and rates have pumped up a little bit right now.”
Expectations for Fed rate cuts have fallen in recent weeks thanks to chair Jerome Powell’s insistence that the central bank will stay the course with its wait-and-see approach to the impact on the US economy of the Trump administration’s trade war.
In March, the Fed’s dot plot – an indication of decisionmakers’ expectations for the economy in the months ahead – indicated officials believed just two more cuts were on the way in 2025, a forecast traders are now in step with.
The Fed lowered rates to the tune of 100 basis points last year, introducing three cuts in September, November and December – the first a jumbo-sized 50-basis-point reduction – but has yet to move its benchmark rate in 2025 despite pressure from the president.
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