Tariffs, Tax Cuts, and the USD: The Next Market Drivers
Article published on February 28th, 2025 6:00AM UK Time
According to ING several factors have contributed to recent declines in US Treasury yields, signaling market hesitation over fiscal and monetary policy dynamics:
1️⃣ Fiscal Efficiency Measures – So far, $55 billion in cost savings have been logged toward the $2 trillion spending cut target, ING note that the feasibility of achieving this remains uncertain and caution that if implemented aggressively, these cuts could weigh on GDP growth, dampening inflationary pressures and reducing the need for higher yields.
2️⃣ Treasury Policy Goals – Treasury Secretary Bessent has expressed a preference for lower long-term yields, signaling a potential shift in bond market dynamics to accommodate fiscal adjustments.
3️⃣ Liquidity Adjustments – Possible changes to the supplementary liquidity ratio (SLR)—such as excluding Treasuries from capital requirements—could increase demand for US bonds, keeping yields contained.
Despite these downward pressures, the 10-year Treasury yield has fallen to 4.3% from 4.8% in mid-January. Current market pricing suggests the Fed Funds rate could fall to 3.68% by April 26, though expectations for near-term easing don’t see a cut until June. Friday’s core PCE deflator release will be a major test, as a 0.4% M/M reading could reinforce the Fed’s cautious stance, limiting expectations for the two rate cuts currently priced in for 2025.
Key Tariff Deadlines to Watch
With fiscal policy providing short-term support for the USD, the trade narrative is becoming a dominant market driver. Several tariff deadlines are approaching, each with the potential to increase volatility across FX markets and risk assets:
📌 March 4 – End of tariff pause on Mexico and Canada imports.
📌 March 12 – 25% tariffs on steel and aluminum set to take effect.
📌 April 1 – Completion of the US trade policy review, which could lead to further tariff announcements.
📌 April 2 – 25% auto tariffs take effect, directly impacting global trade flows and major economies, particularly the EU, Japan, and Mexico.
💡 Bottom Line: While fiscal policy has temporarily steadied the USD, tariff risks are re-emerging as a dominant market force. Expect increased volatility in the coming weeks, and broader risk assets, as markets react to the evolving US trade policy landscape.