The Fed gives a path to cut interest rates: If the Trump administration imposes about 10% tariffs, the Fed may cut interest rates in the second half of the year

Source:** China Fund News  

**Big News on Federal Reserve Rate Cuts**  

Federal Reserve Governor Christopher Waller said the Fed may start cutting interest rates in the second half of 2025 if the Trump administration maintains tariffs on U.S. trading partners at around 10%.  

"If we can get tariffs down to near 10% and have them settled and fully implemented by July, then we're in a good position for the second half," Waller said in an interview with Fox Business Network on Thursday.  

He added, "That would put the Fed in a good position to carry out a series of rate cuts in the second half."  

Fed officials have kept benchmark rates unchanged this year due to the robust overall economic performance and uncertainties about Trump's tariff policies.  

Trump has imposed a base 10% tariff on dozens of U.S. trading partners and temporarily shelved plans to impose higher tariffs. He also imposed a 30% tariff on many Chinese imports, after previously imposing tariffs exceeding 100% on Chinese goods.  

Although recent tariffs on China have eased, economists generally expect Trump's trade policies to suppress economic growth and drive up inflation. Waller reiterated that he expects the inflationary uptick related to tariffs to be temporary.  

He noted that if the government reinstates higher tariffs, it would "have a greater impact on inflation and significantly limit our room to adjust short-term interest rates."  

Waller's remarks came shortly after Trump's signature tax cut bill passed the House of Representatives by a narrow margin. The bill, which now goes to the Senate for consideration, includes extending Trump's first-term tax cuts, raising the U.S. debt ceiling, and further increasing the federal fiscal deficit.  

As concerns about the U.S. fiscal outlook grow, long-term U.S. Treasury bonds continued to be sold off on Wednesday following weak demand in the 20-year Treasury auction. The yield on the 30-year Treasury rose above 5%, hitting its highest level since 2023.  

When asked about the reasons for the sell-off in U.S. Treasuries, Waller said he had heard feedback from financial market participants about the Republican tax bill.  

" They had expected the bill to do more on fiscal austerity, but they didn't actually see that happen," Waller said.  

**U.S. Stock Situation**  

On the evening of May 22, U.S. stocks stabilized after opening, with the three major indexes fluctuating. The Dow rose slightly, the Nasdaq gained about 0.6%, and the S&P 500 index rose slightly.  

After suffering its worst stock sell-off in a month, the S&P 500 index was volatile. While most sectors fell, the world's largest technology companies rebounded. Google rose for two consecutive days,累计 (cumulatively) gaining about 6%. Long-term U.S. Treasuries, which had been sold off due to market concerns about the surge in U.S. debt, recovered most of their earlier losses. Bitcoin broke through $111,000.  

Craig Johnson of Piper Sandler said, "Stocks are cooling off from short-term overbought conditions. However, with still-healthy market breadth, it is now more likely to enter a benign pause/consolidation phase rather than another sharp decline."  

With traders closely watching bond market trends, yields remain high, suppressing investor appetite for risky assets. The market is concerned that Trump's signature tax reform bill, while barely passing the House, will further inflate the U.S. fiscal deficit.  

This confirms a point repeatedly emphasized by many financial market participants: unless the U.S. cleans up its fiscal position as soon as possible, the perceived risk of government borrowing will rise, and the borrowing costs of long-term Treasuries will climb further. This will make it more difficult to reduce the deficit and raise financing costs for households and businesses across the economy.  

Mark Haefele of UBS Global Wealth Management noted, "Market volatility has resurfaced due to renewed uncertainties about trade policies and fiscal prospects. Given the high bond yields and the focus on tariff and budget issues, this volatility is likely to persist, and investors need to continue to monitor further policy developments."  

On the economic front, although price pressures continue to rise, U.S. business activity and output expectations have improved due to reduced trade-related concerns. Initial jobless claims fell to a four-week low, indicating a still-healthy labor market. At the same time, existing home sales unexpectedly declined to a seven-month low.  

**Disclaimer:** The views in this article represent only the author's personal opinions and do not constitute investment advice from this platform. This platform does not guarantee the accuracy, completeness, originality, or timeliness of the article information and is not liable for any losses arising from the use of or reliance on the article information.