2025-04-04T08:58:20.000Z

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The recent implementation of reciprocal tariffs by the United States has raised alarm bells across global financial markets, threatening to stymie economic growth and push inflation higher. According to a report by Nomura, a prominent financial services group, these developments are compelling the Federal Reserve to consider lowering interest rates sooner than previously anticipated, with potential cuts beginning as early as the end of this year.

On Wednesday, U.S. President Donald Trump announced sweeping tariffs affecting numerous countries, intensifying the risk of a global trade war. This move has ignited fears of an economic slowdown on a global scale, raising concerns among economists about a possible recession. The newly imposed tariffs are seen as “worse than feared,” prompting Nomura to revise its estimates significantly. They have lowered their forecast for U.S. GDP growth to just 0.6 percent, down from an earlier estimate of 1.5 percent on a quarterly basis. Additionally, they expect the core Personal Consumption Expenditures (PCE)—the Fed's preferred inflation measure—to rise to 4.7 percent from a previous forecast of 3.5 percent by year-end.

Given this economic environment, Nomura now predicts that the Federal Reserve will begin to cut interest rates in December, adjusting the policy rate to 4.125 percent. Following this, they anticipate two further cuts of 25 basis points in the first quarter of 2026. Previously, the brokerage had expected the central bank to maintain rates between 4.25 percent and 4.5 percent until at least the second quarter of 2026.

In a note released on Thursday, Nomura economists, led by David Seif, stated, “Increased downside risks to growth and a more front-loaded inflation shock should allow cuts to resume sooner than we had expected.” This sentiment has been echoed by traders, who have increased their bets on a full percentage point cut in interest rates this year, compared to the 75 basis points reduction that was considered likely before Trump's tariff announcement.

Meanwhile, the European Central Bank (ECB) is also expected to respond swiftly to the economic ramifications of these tariffs. Nomura forecasts that the ECB will need to act even more quickly than the Fed, particularly as the tariffs impose an effective duty increase to 20 percent for countries within the European Union. In a separate analysis on Thursday, Nomura adjusted its growth forecast for the Eurozone, lowering it by 20 basis points, while also expressing uncertainty regarding inflation in the region.

Consequently, Nomura now anticipates that the ECB will implement rate cuts in both April and June, rather than solely in June as previously expected. The bank's terminal rate forecast has been revised down from 2.25 percent to 2.00 percent. Following the announcement of the tariffs, traders are now estimating a roughly 70 percent probability of a quarter-point rate cut this month, projecting a depo rate of 1.75 percent by the year's end, which would imply three additional cuts.