If the Federal Reserve cuts interest rates this year, don’t bank on it curing your borrowing woes.
As panic over President Donald Trump’s massive “Liberation Day” tariffs swept across global financial markets, traders started upping their bets that U.S. central bankers might soon cut interest rates.
Investors now predict a more than 1-in-3 (or 34 percent) chance that the Fed will cut borrowing costs by three quarters of a percentage point, up from a perceived 6 percent probability in mid-February, CME Group’s FedWatch tool shows. Some even started betting on a rate cut as soon as the U.S. central bank’s next meeting in May.
But it isn’t because everyone expects inflation to slow. Rather, a growing assumption is that the Fed might have to cut borrowing costs for “bad” economic reasons: higher unemployment, a slowdown in growth, or worse, a recession.
Hours after Trump announced plans to slap higher tariffs on every country that trades with the U.S., economists across the country started making sizable adjustments to their inflation forecasts for the year ahead. Oxford Economics’ Chief Economist Ryan Sweet upgraded his team’s inflation forecast for 2025, now expecting that consumers could see another 4 percent increase in prices, up from last year’s inflation rate of 2.9 percent. Previously, his team had projected a 3 percent increase in inflation for the year.
Nationwide’s Chief Economist Kathy Bostjancic, meanwhile, says there’s a risk inflation could surge as high as 4.5 percent if Trump’s suite of reciprocal tariffs goes into effect after a 90-day pause.
When paired with a weaker economy, cheaper rates could do little to make it an easier time for Americans to borrow money, economists and financial experts interviewed by Bankrate say. They also might not fix the tariff-led shock that’s been roiling business, consumer and investor confidence.
If the Fed does cut rates, it is now far more likely to be in response to economic weakness rather than inflation subsiding. I don’t see how this is a win for anybody.
— Greg McBride, CFA, Bankrate chief financial analyst
‘Why’ rates fall can matter more than ‘when’
Three years after the Fed rushed to raise interest rates at the fastest pace in a generation, Americans have been waiting for the day that borrowing costs drop. Longer-term interest rates — driven predominantly by activity in the bond market — have been the first to move. In the span of a month, the 30-year fixed-rate mortgage tumbled by more than 20 basis points, now hovering at 6.83 percent as of April 9, according to Bankrate data.
In a post on X from Monday, Trump cheered the news, as well as a decline in global oil prices to a 4-year low and called the Fed to cut its own benchmark rate.
But those moves happened as experts began warning of an abrupt global slowdown. Economists in Bankrate’s first-quarter Economic Indicator Survey raised their recession forecasts by the most since 2022 to 36 percent. Morgan Stanley put the odds of a downturn this year at 45 percent, while Oxford’s Sweet said the full suite of reciprocal tariffs raises the probability of a recession to 55 percent. J.P. Morgan Chase and KPMG, meanwhile, put the odds of a downturn at 60 percent.
Recession risks are rising because tariffs could weigh on consumer spending and increase businesses’ production costs, factors that might ultimately lead to higher unemployment.
“If those disruptions are coupled with lower gas prices, that is not good,” says KPMG’s Senior Economist Yelena Maleyev. “A slowing economy means I’m not guaranteed the same income stream. It does not create an economic environment in which consumers feel they have more purchasing power or that they’re back to how they were feeling in 2019, before all this inflation happened.”
The same could be said for lower interest rates. For starters, a surge in unemployment or job losses could tighten lending and make financial firms pickier about who they approve for loans.
That could come at a time when lending has already been tight for many Americans. Even as unemployment held near historically low levels, nearly half of Americans who applied for a loan or financial product since December 2023 (48 percent) faced a rejection in Bankrate’s Credit Denials Survey from February 2025. Applicants with credit scores under 670 (at 64 percent) were more than two times as likely as those with exceptional credit to be rejected (at 29 percent for applicants with scores between 800-850). Yet, about half (45 percent) of applicants with scores between 670-799 — those with “good” or “very good” credit — were denied, too.
Meanwhile, Americans might not have much interest in committing to paying for longer-term, big-ticket purchases like homes or cars if they’re worried about their income. Consumer sentiment in March tumbled to a two-year low, with the share of respondents estimating that they or their spouse would lose their job hitting the highest since 2020 (23 percent), according to the University of Michigan’s survey.
Lower rates are meant to incentivize borrowing, and they typically make it easier to access credit. Those factors, though, might impair Americans’ ability to borrow money, according to McBride.
“If the economy is slowing and that’s why the Fed is cutting interest rates, it’s also an environment where lenders are tightening credit and borrower fundamentals are either already deteriorating or are about to,” McBride says. “And that would mean things like higher unemployment, higher debt-to-income ratios, more late payments — the type of things that should keep you from qualifying for a loan or keep you from qualifying for a good rate.”
Tariffs put the Fed between a rock and a hard place: Rescuing the job market or keeping inflation in check
The other question is how much room the U.S. central bank has to cut interest rates. In public remarks two days after Trump announced reciprocal tariffs, Fed Chair Jerome Powell continued to reiterate that the Fed did not “need to be in a hurry” to adjust rates and that they have time to evaluate what the Trump administration’s policies could mean for employment and inflation.
He also said, however, the Fed’s “obligation” was to ensure that a tariff-driven increase doesn’t spiral into a broader problem with price pressures, suggesting the Fed might be inclined to keep rates higher for even longer than markets expect.
“While tariffs are highly likely to generate at least a temporary rise in inflation, it is also possible that the effects could be more persistent,” Powell said in an April 7 address to business journalists. “It is too soon to say what will be the appropriate path for monetary policy.”
Trump’s planned second-term tariffs are now almost 10 times bigger than the duties of his first term — policies that even back then led the Fed to cut interest rates three times in 2019. Yet, the U.S. central bank is facing different economic circumstances. Even before higher import taxes came into the picture, their post-pandemic inflation war was still ongoing, as price pressures stayed above their 2 percent target.
“We didn’t have this environment back in 2017-18 when the last tariffs were introduced,” Maleyev says. “Producers still have the muscle memory of raising prices due to supply chain concerns from the last few years.”
At the same time, a slowdown in consumer spending or higher unemployment might take away from companies’ pricing power. Back in March, Powell said weaker growth and inflation could effectively “cancel each other out.”
Yet, Maleyev also doesn’t expect that the Fed will have enough confidence that inflationary pressures are subsiding until the second half of the year. She’s expecting just two cuts in 2025, at the U.S. central bank’s October and December meetings. Morgan Stanley’s team, meanwhile, doesn’t expect that the Fed will cut rates at all this year.
“The Fed will be a bit slow at the beginning,” Maleyev says. “Inflation will pick up first, and that’s going to be a concern.”
Rate cuts also might not be a good medicine to fix the problem. The Fed’s tools are predominantly designed to stimulate demand. If companies or consumers are uncertain about the Trump administration’s next steps with tariffs, low interest rates might not be enough to incentivize them to make purchases, hire or invest. Not to mention, higher building prices from steel, aluminum and lumber imports could weigh on capital investment, according to George Washington University professor David Halliday.
If the economy has slowed, demand for increased business capacity will likely go down, and the price to build a home may simply be too high to stomach. The greed when prices are cheap will be overridden by the fear of uncertainty, and that’s a bad combination.
— David Halliday, associate professor of strategic management and public policy at George Washington University’s School of Business
How to take advantage of lower interest rates, even if the U.S. economy is in tough shape
Just as individuals with excellent credit scores are usually offered the most advantageous borrowing terms in high-rate eras, they are also the ones who encounter the fewest obstacles when seeking credit in a decelerating economy.
Getting paid back is always lenders’ utmost concern. They’ll primarily want to see that a potential borrower has a history of on-time payments and a steady income, McBride says.
“Only one of those is really firmly under your own control,” he adds. “Employment and delinquent payments are the two big roadblocks that jump up in an economic downturn.”
If you’re still hoping to be able to make a big-ticket purchase this year, here’s what you should keep in mind:
“Just because you can doesn’t mean you should,” McBride says, referring to making a big-ticket purchase that requires financing. “The better course of action is putting yourself in a financial position where you don’t have to borrow, but if you did, you could do so on the most favorable terms.”
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