From One Cut to Four: What Markets Are Pricing In

Market analysts are now expecting up to 4 rate cuts this year following the heightened volatility of markets over the past few weeks. The conversation shifted to “how many, and how fast?” leading us to question – why has this happened and what could this mean for markets?

What Has Happened

At the start of 2025, many analysts and investors were predicting one rate cut throughout the year. However, with the recent introduction of US tariffs causing extreme uncertainty in the market, many of these same analysts are now predicting up to four rate cuts, beginning as early as June.

The Fed released March 2025 CPI yesterday showing that the consumer price index dropped by 0.1% last month, following a 0.2% increase in February. This dip marks one step forward towards the Federal Reserve’s 2% target, bringing year-on-year inflation down to 2.4%.

Whilst the slowing of inflation displays promise, the recent introduction of US tariffs placed on international imports adds another layer of uncertainty in the markets – further fuelled by President Donald Trump doubling down on tariffs imposed upon China, even despite the threat of retaliation.

Market Reactions

Understandably, the decrease in inflation has sparked a variety of views from market investors. While some raise concerns about what is to come following the introduction of tariffs, others expressed relief at the decline in inflation. Ultimately, the market seems unsure what to focus on.

If tensions with China ease and inflation stays low or continues to decline, it is a green light for investors and good news all round. However, many feel that The Fed faces a tough decision between acting early or waiting for more clarity as uncertainty looms. All that matters is how future data reflects the effect of tariffs and slowing consumer demand, with the threat of stagnation becoming a growing concern.

Financial markets also exhibited notable reactions across various asset classes including:

Dollar softening at 1.2%, Euro strengthening 1.45%
Gold prices rising 0.4%
US stock index futures fluctuated but remained below 0, 1.7% down

Ultimately, the figures suggest investor uncertainty or concern following the CPI report and the tariff news. Assets often viewed as hedges against inflation and currency fluctuations, such as gold, are on the rise, evidencing the need for protection against future inflationary pressures, especially considering ongoing trade tensions and tariff implementations.

What This Means for Liquidity and Execution

Throughout times of uncertainty, bid-ask spreads tend to widen, particularly during significant economic data releases. This reflects heightened risk perception among liquidity providers, who widen spreads to manage price uncertainty and reduced depth. There are a few things for market participants to consider during this time:

Access to reliable liquidity sources is crucial. It is more important than ever to have the highest level of transparency on your positions and understand underlying portfolios with detail and accuracy.
Utilising advanced analytics to monitor market conditions and execution performance is also crucial – particularly with the increasing use of execution algorithms.
Real-time monitoring systems allow firms to detect emerging risks and provide the tools to act upon this information accordingly.

Conclusion

The majority of traders predict that the US Federal Reserve will continue to cut interest rates in June, with up to 4 rate cuts predicted in 2025 in an attempt to stimulate economic growth. However, this is a time when inflation data remains mixed and there is extreme uncertainty around trade policy and tariffs.

The release of the US CPI yesterday suggested that inflation is softening, but market reactions reinforce investor scepticism around the long-term effectiveness of rate cuts. For institutional clients, this environment underscores the need for real-time analytics, consistent liquidity access, and macro-aware support.