The new tariffs announced by the Trump administration are likely to boost inflation, which could prevent the Federal Reserve from cutting interest rates this year, according to Morgan Stanley Research.
“The recent announcement boosts the risk of rising inflation, particularly over the next three to six months,” says U.S. Chief Economist Michael Gapen. “Tariff-induced inflation will keep the Fed on the sidelines and as a result, Morgan Stanley Research is no longer anticipating a June rate cut.”
Instead, Gapen and his colleagues now expect the Fed to wait until next March to begin cutting rates, ultimately ending 2026 in the range of 2.5% to 2.75%.
On April 2, the White House imposed a baseline 10% tariff on all imports, in addition to incremental tariffs on a country-by-country basis. The effective tariff rate could be as high as 22% if the new tariffs are applied on top of existing ones, compared to 3% at the start of the year.
“Tariff rates are rising much more quickly than we anticipated,” says Michael Zezas, Global Head of Fixed Income Research and Public Policy Strategy. “We previously did not expect tariff rates to peak until later this year or early next year.”
More Economic Growth Concerns
The Fed kept the U.S. interest rate unchanged in the range of 4.25% to 4.5% at its March monetary policy meeting, as expected. However, the Committee highlighted increasing uncertainty around the economic outlook. Fed officials lowered their gross domestic product (GDP) growth forecast for this year to 1.7% from 2% and increased their estimate for inflation to 2.7% from 2.5%.
“Larger tariffs, as well as indications that the tariffs will last, could weigh further on investor growth expectations, which could lead to deterioration of asset prices, and then worsen the outlook for consumer spending,” Gapen says.
Even before the April 2 announcement, the uncertainty surrounding government action on trade, immigration and fiscal policy was putting negative pressure on sentiment about the economy. Consumer confidence fell in March for the fourth consecutive month, while consumers’ expectations for the short-term outlook sank to the lowest level in 12 years, according to The Conference Board.1
