Nomura predicts that new U.S. tariffs will hamper economic growth and push inflation higher, forcing the Federal Reserve to begin cutting interest rates by December. The firm now expects the Fed to lower its policy rate to 4.125% by the end of the year, followed by two additional 25-basis-point cuts in the first quarter of 2026. Previously, Nomura had anticipated that the central bank would maintain rates at 4.25%-4.5% until mid-2026.
On Wednesday, President Donald Trump announced sweeping tariffs on multiple countries, intensifying concerns about a global trade war. Economists warn that these measures could trigger an economic slowdown or even a recession. In response, Nomura has revised its U.S. GDP growth forecast down to 0.6% from 1.5% on a quarterly basis. Additionally, it raised its projection for year-end core PCE inflation to 4.7% from 3.5%.
David Seif, chief economist at Nomura, noted that the increased risks to economic growth and the faster-than-expected inflation shock make it likely that the Fed will move sooner on rate cuts. Traders now pricing in a 1% reduction in rates by the end of the year.
The European Central Bank may be forced to act even sooner than the Fed, according to Nomura. Trump’s tariffs will effectively raise duties on European Union goods to 20%, adding to economic pressure in the region. Given the uncertainty surrounding inflation and growth prospects, the brokerage has adjusted its outlook, now predicting ECB rate cuts in both April and June, instead of just in June. This would bring the terminal interest rate down to 2.00%, compared to the earlier forecast of 2.25%. Traders now see a 70% probability of a quarter-point rate cut as early as this month.