by Daniel Brouse
April 4, 2025
The answer: it’s complicated — and highly uncertain.
In the short term, interest rates have dropped to recent lows. Markets are increasingly pricing in the likelihood of a recession due to escalating global trade tensions. As a result, expectations are rising that the Federal Reserve may begin cutting interest rates in an attempt to cushion the economic blow and stimulate demand.
However, the medium-term outlook is far more complex. The imposition of widespread tariffs and retaliatory measures may lead to a sharp increase in prices for imported goods — especially raw materials, components, and consumer products — potentially fueling inflation. This “stagflation” scenario, where inflation rises even as growth slows, could force the Fed to reverse course and hike rates, much like it did in the wake of the COVID-19 pandemic, when interest rates surged above 9%.
On the other hand, some economists warn of a looming global depression. The combination of collapsing international trade, a strong dollar, weakening demand for commodities (including a sharp drop in oil prices), and plummeting consumer confidence could trigger a sustained deflationary spiral. In this case, we may see interest rates fall even further — possibly to near-zero levels — similar to what occurred during the Great Depression.
In short, the global trade war has created an unprecedented economic paradox. Whether we face inflation, deflation, or both in alternating waves, one thing is clear: interest rates are likely to be volatile and unpredictable for the foreseeable future.