Trump's trade war seen deterring rate cuts despite increasing risks to growth

Likelihood of tariffs fuelling inflation may force many central banks to hold back

- Ovais Subhani

An escalating trade conflict between the US and its top trade partners has heightened fears of an economic downturn.

At the same time, the likelihood that tariffs will reinvigorate inflation may force many central banks, including the US Federal Reserve, to hold back from cutting interest rates.

As the US Fed meets on March 19 to decide whether to implement a rate cut, it will have to take into account the palpable threat to the pace of growth amid the pullback in US bond yields, with the 10-year Treasury yield falling to 4.3 per cent from 2025's peak of 4.8 per cent on Jan 13.

Lower bond yields usually suggest that a slowdown in economic growth will lessen the chances of an inflationary surge and prompt the central bank to cut its benchmark rates.

JPMorgan chief economist Bruce Kasman told reporters in Singapore last week that he sees a 40 per cent recession risk, up from 30 per cent at the start of 2025, while Moody's Analytics chief economist Mark Zandi raised his recession odds to 35 per cent from 15 per cent.

Mr Larry Summers, who led the US Treasury Department from 1999 to 2001, said the recession odds are getting close to 50/50.

The warnings follow the US' 20 per cent tariff on China, a 25 per cent levy on steel and aluminium, and the flip-flop on tariffs on Canadian and Mexican goods, which were subsequently given a one-month reprieve.

Hence, there is an emerging consensus on Wall Street that the Fed will cut its key funds rate at least three times in 2025 - more than the central bank's own estimate of two cuts in 2025.