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

U.S. President Donald Trump has intensified his tariff rhetoric this week, but financial markets aren't convinced, likely expecting the President to back down and eventually reach a compromise with trading partners.

Earlier this week, the Trump administration sent out letters to 14 countries, warning of higher tariffs on their export of goods to the U.S. starting on Aug. 1. The original 90-day pause on tariffs was set to expire on July 9. On Tuesday, Trump stated on Truth Social that the Aug. 1 deadline won't be extended and new tariffs will go into effect on that day.

However, markets seem to believe the adage that Trump always chicken out (TACO), as evident from the steady interest rate expectations in the U.S.

As of writing, the CME's FedWatch tool showed expectations for two 25 basis point rate cuts this year, with the first to come through in September. Markets priced out the July rate cut following Friday's hotter-than-expected jobs report and the hawkish repricing has held steady in the wake of Trump's tariff threat. At the same time, there seems to be little-to-no fear about a tariff-led spike in inflation, else traders might have priced out the September rate cut as well.

That's in stark contrast to March when Trump's tariff threats saw traders price rapid fire rate cuts, starting from June this year. Perhaps, traders expect the deadline to be suspended indefinitely, leading to negotiations and eventual trade deals, as ForexLive noted.

The MOVE index, which measures the options-based 30-day implied volatility in the U.S. Treasury notes, continues to trend lower as opposed to early this year when trade war fears and fiscal concerns saw the index rise from 86.00 to 139.00 in two months to early April.

The U.S. equity markets and bitcoin BTC$90,184.71 aren't paying heed to Trump's threat either. On Monday, the S&P 500 dropped 0.8% to 6,210 points and quickly stabilized Tuesday at 6,225.

Bitcoin, the leading cryptocurrency by market value, continues to trade lackluster above $105,000, CoinDesk data show. Both markets peaked in February and trended lower as the first round of tariffs war unfolded in March and early April.

Lastly, the dollar index, which tracks the greenback's value against major currencies, rose 0.55% to 97.60 Monday and has since stabilized around these levels, topping the bearish trendline from the Feb. 3 highs.

Read more: Key Market Dynamic Keeps Bitcoin, XRP Anchored to $110K and $2.3 as Ether Looks Prone to Volatility