Trump’s Tariff Threat Fails to Move the Needle on Fed Interest Rate Expectations

President Trump’s recent escalation of tariff threats has had a muted impact on financial markets, suggesting a lack of conviction in the market regarding the likelihood of the tariffs actually being implemented. Despite Trump’s declaration on Truth Social that the August 1st deadline for new tariffs on 14 countries would not be extended, market participants remain largely unconcerned. This apparent skepticism aligns with the prevailing “Trump Always Chickens Out” (TACO) adage, reflecting a belief that the President will ultimately negotiate a compromise.

The CME’s FedWatch tool continues to project two 25 basis point rate cuts this year, with the first anticipated in September. This expectation remains unchanged despite Trump’s tariff announcement, highlighting a lack of concern about inflation spiking due to the tariffs. This contrasts sharply with March, when similar tariff threats led to market pricing of significantly more aggressive rate cuts. The current market sentiment suggests a belief that the August 1st deadline will be extended indefinitely, paving the way for negotiations and subsequent trade deals.

The MOVE index, a measure of implied volatility in U.S. Treasury notes, continues its downward trend, further supporting the view that market participants are not overly worried. This contrasts with earlier this year when trade war fears pushed the index to significantly higher levels. Similarly, the S&P 500 and Bitcoin have shown resilience, experiencing only minor initial dips before stabilizing. Both markets peaked in February and experienced declines during the initial tariff discussions in March and April. The dollar index, meanwhile, briefly rose following Trump’s announcement but has since settled around its recent levels, defying a previous bearish trend.

Overall, the market’s reaction suggests a belief that Trump’s tariff threats are largely bluster, unlikely to significantly impact the economy or markets in the long run. The continued expectation of rate cuts and the lack of inflationary fears further reinforce this assessment. The subdued reaction underlines a growing market confidence in Trump’s willingness to compromise and avoid a full-blown trade war.