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Fed Watchers Now See Rate Cuts This Year as Tariffs Hit Economy

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The Federal Reserve building in Washington (Photo; AP)

Federal Reserve watchers said the central bank will abandon its patient policy stance and cut interest rates in coming months as President Donald Trump’s planned new tariffs on Mexican goods may drag down U.S. economic growth.

JPMorgan Chase & Co. chief U.S. economist Michael Feroli now projects quarter-point rate reductions in September and December, while Barclays Plc’s Michael Gapen sees a half-point cut in September followed by another quarter-point by year-end.

NatWest Markets economists and former Fed Governor Laurence Meyer also said the central bank will act to bolster an economy that is being buffeted by trade tensions and other headwinds.

“Even if a deal is quickly reached with Mexico, which seems plausible, the damage to business confidence could be lasting, with consequences that might still require a Fed response,’’ Feroli said in a note to clients on Friday.

President Donald Trump said late Thursday that the U.S. would put 5% duties on all Mexican imports on June 10, rising in increments to 25% in October, unless Mexico halts “illegal migrants” heading to the U.S. Stocks fell on the news and investors increased bets that the central bank would ease policy this year.

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Fed Vice Chairman Richard Clarida said on Thursday, before Trump’s announcement, that the central bank would be prepared to ease policy if it saw mounting risks to the U.S. economic expansion.

Feroli said the Fed “may well need to cut by much more than 50 basis points’’ if the tariffs on Mexico are raised to 25%. Gapen wrote that “earlier action is not out of the question, in our view, if financial conditions deteriorate rapidly,” a view echoed at NatWest by chief U.S. economist Michelle Girard.

Meyer, in a note to clients on Thursday before Trump’s tariff announcement, predicted the Fed would reduce rates this year.

“We don’t think the sky is falling,” said Meyer, who heads Monetary Policy Analytics in Washington. “Rather, we think that by September the argument will prevail that, after a long period of patience, a 25-basis-point rate cut would represent a prudent recalibration of monetary policy.”

Meyer listed a sharper-than-expected slowdown in growth, tighter financial conditions, and weak core inflation as reasons why the Fed will “soon become impatient.”

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