Traders see five Fed cuts in 2025 and the risk of an emergency move

The stampede in global markets gathered momentum Monday, and investors piled into safe-haven assets as the fallout from US President Donald Trump's tariffs deepened. The carnage in financial markets has analysts betting on five Federal Reserve rate cuts this year, up from just two last month.

The Fed's dot plots project just two rate cuts this year. But traders have increased their rate cut projections to five this year on recession bets. Last month, just two cuts were fully priced. That changed to three last week. Now, a total of 1.5 per cent cuts are priced in.

The swaps market shows a chance of about 40 per cent that the Fed will lower rates by 0.25 per cent by next week in an emergency move. Those rate cuts bets are for well before the Fed's next scheduled policy decision on May 7. The rapid repricing reflects the fear sweeping global markets.

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The yield on the US two-year bond, among the most sensitive to monetary policy, fell as much as 22 basis points to 3.43 per cent on Monday. That comes after about 50 basis points fall in total since Trump announced the levies last Wednesday. The bond market is also signalling a Fed rate cut soon.

Will the Fed step in to stop the rut?

But will the US Central bank step in? Will it focus on the massive wealth loss from the bloodbath in markets, or will it look at surging prices from Trump tariffs instead?

The Fed has previously voiced concerns about wealth losses from market slumps. However, stagflation risks are likely to limit the Fed's ability to intervene to support the economy. Still, market watchers expect the Fed to pre-empt the economic loss and step in.

Trump, though, is showing little appetite to back down on aggressive trade tariffs announced last week. He told reporters on Sunday evening to "Forget markets for a second."

He and his team dismissed investor fears of inflation and recession, offering no apologies for the turmoil sparked by sweeping global tariffs and defiantly insisting a boom is on the horizon.

(With the inputs from the agencies)