As the U.S. government's tariffs stoke concerns about a global recession, traders are raising expectations for the Federal Reserve to cut interest rates this year, with markets increasingly betting on an emergency rate cut.

According to overnight interest rate swaps, market pricing shows that the Fed will cut interest rates by 125 basis points by the end of the year, equivalent to five 25 basis point cuts. The swap market also shows that the probability of the Fed cutting its benchmark interest rate by 25 basis points next week is about 40%, which is well before the Fed's next policy decision on May 7.

The rapid repricing reflects the panic sweeping global markets as Trump shows little willingness to back down from aggressive tariffs announced last week, telling reporters late Sunday to “forget the market.”

Investors are dumping risk and snapping up bonds, sending yields plunging. The 2-year Treasury yield, the most sensitive to monetary policy, fell 22 basis points to 3.43% on Monday, and has fallen about 50 basis points since Trump announced the reciprocal tariffs last Wednesday.

“There is no good news. The market is getting worse and worse,” said Michael Brown, senior research strategist at Pepperstone. “A policy shift, whether from the White House or the Fed, is what the market is craving. For now, neither seems likely, which would lead to more economic and market pain.”

German government bonds also rose sharply on Monday, with the yield on the two-year German bond falling 20 basis points to just over 1.60%, the lowest since October 2022. Safe-haven currencies such as the yen and Swiss franc soared against the dollar.

Recession is coming

JPMorgan Chase The bank recently said that the U.S. economy is expected to fall into recession this year. The bank's chief economist Michael Feroli expects the Federal Reserve to cut interest rates in June and take action at each subsequent meeting until January next year.

Goldman Sachs Economists last week also adjusted their baseline forecasts to see both the Federal Reserve and the European Central Bank cutting rates three more times this year.

Governments around the world are rushing to negotiate with U.S. officials to reduce tariffs on their exports. Markets are in free fall as traders factor in uncertainty about whether a deal can be reached.

Traders also adjusted their bets on rate cuts from the European Central Bank and the Bank of England, anticipating that policymakers will have to act to protect the economy. Swap markets are currently pricing in three 25 basis point rate cuts from both central banks this year, with a roughly 50 percent chance of a fourth cut.

Of course, Fed Chairman Jerome Powell made clear on Friday that he is in no rush to cut rates despite the market turmoil, and in a speech he stressed that still-high inflation means policymakers need to tread carefully given that tariffs could temporarily push up prices.

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