Traders are increasingly anticipating interest rate cuts in the current year, with a potential 100-basis point reduction by December as per CME FedWatch data. The escalation of President Trump's recent tariffs has led investors to heighten concerns about a possible recession. There is growing speculation that the Federal Reserve may need to lower interest rates due to the economic impact of the trade disputes initiated by President Trump.

The implementation of higher tariffs by the White House took markets by surprise, causing a decline in asset prices and sparking worries about a severe economic downturn. Economists, like JPMorgan's Michael Feroli, express concerns that the tariffs' inflationary effects could dampen consumer spending and push the economy close to recession territory.

Traders now have more confidence in the likelihood of interest rate cuts by the Fed to stimulate economic growth. The odds of a quarter-point cut in May surged from 10.62% to 26% within a day, with expectations of further cuts increasing for the rest of the year. By December, investors predict a total reduction of 100 basis points in the fed funds rate.

Despite initial projections of rate cuts, uncertainties surrounding the impact of Trump's trade policies have prompted the Fed to adopt a cautious approach. Market participants are bracing for a potential recession, with indications from bettors on Kalshi suggesting a 54% chance of a US economic downturn this year. However, some analysts, like those at Morgan Stanley, believe that the tariffs may delay further rate cuts by the Fed, pending a sustained moderate growth environment.