The bond market is confused over what to make of Presiden🧔t Donald Trump’s quickly shifting trade policies.

When tariffs seem in full swing, investors in the bond market worry the economy will slump, and the Federal Reserve may need to cut interest rates. When Trump backs off his more aggressive policies, expectat♒ions of rate cuts from the Federal Reserve fade away. 

It is unclear which narrative will prevail, but the longer🅺 policy uncertainty continues, the more likely an economic downt🍒urn will occur.

“We still feel like there’s enough to keep the economy afloat as we deal with this tariff episode,” said Brent Coggins, chief investment officer at Triad Wealth Partners. “But it’s got to be an episode. It cannot be a series. This thing has to end somewhat on the sooner side, otherwise it is just going to spi🌞ll over.”

The next moves from the Fe💟deral Reserve and the stock market could inform what trader🍌s in the bond market will do next.

Long-Term Interest Rates Are Falling

The yield on the 10-year U.S. Treasury note, a benchmark that helps determine mortgage rat🦹es, soared after Trump’s election as investors foresaw an economic boom that would bring about higher inflation. 

But after peaking at 4.79% in mid-January, the 10-year yield fell to as low as 4.11% early last week, when tariffs agai👍nst vital U.S. trading partners, Mexico and Canada, were about to be implemented. As Trump delayed many of those tariffs, the yield climbed back to about 4.3%.

Lower long-term interest raꦬtes may be good news for those looking to buy a home or refinance as mortgage rates follow moves in the 10-year Treasury. But the reason why the🍌y’re falling — worries over a possible recession and job losses — is just as important. 

Worries over a downturn are “causing markets to rapidly reassess just how much longer the U.S. macro success story can continue,” analysts at the Dutch bank ING wrote in a research note. But there’s a chance that inves𝔍tors are “overdoing the gloom,” they added.

What's the Federal Reserve Got to Do With It?

Federal Reserve Chairman Jerome Powell does not appear overly alarmed, though he said Friday that the central bank will “co🐟ntinue to carefully monitor” how a still-solid eco💃nomy will fare. 

Some analysts worry that tariffs would push up inflation a𒀰gain, 🌳as prices would rise on the imported goods U.S. consumers buy. However, the bigger worry dragging down markets is growth since some investors fear uncertainty will make consumers more cautious about spending.

Though the Fed has little control over long-term interest rates, the short-term rates it does set can ultimately add up to higher rates over time. That means tha🐲t the bond market can be sensitive to inflation, and when the Fed maintains a high interest rate, bond prices often fall, reducing returns.

The Fed can boost the economy by cutting short-term interest﷽ rates, making it cheaper for consumers to use their credit cards or borrow money for a new car. Some investors think the Fed, after paused rate cuts in January, is poised to continue lowering rates at least a couple of times this year.

On Friday, Powell said the Fed isn’t in a big rush and is focused on “separating the signal from the noise🐎.” 

😼The Fed is in a “tight spot,” wrote Michael Gapen, chief U.S. economist at Morgan Stanley, who sees the central bank cutting rates once this year. Some in the markets have “unrealistic expectations” about how much the Fed can cut this year, he wrﷺote since tariffs could lead to inflation rearing its head again.

Where Does the Stock Market Come Into Play?

It's not just the bond market that's been roiled by Trump's on-again, off-again 澳洲幸运5官方开奖结果体彩网:tariff threats; they have 澳洲幸运5官方开奖结果体彩网:undermined confidence among business leaders and consumers and 澳洲幸运5官方开奖结果体彩网:sent stocks tumbling.

While a recession remains unlikely, a steep decline in the stock market could trigger an economic downturn and force the Fed to reevaluate, Gapen wrote. Just as rising st♛ock markets made upper൩-income households feel wealthier and stimulated spending, a sharp drop would make them more cautious. 

“A decline of 15-20% might be needed to have households conclude their wealth had ‘perm🍸anently’ fallen and, in turn, slow their spending,” Gapen wrote. 

The S&P 500 index is off more than 8% from its mid-February highs, a steep sell-off but one that doesn’t put that threshold in sight yet, analysts said.