The market eagerly awaits, when will the Federal Reserve (FED) take action? Looking back in history to the pivotal moment of the tariff crisis.

The current market oscillates between fear and expectation, with key signals possibly coming from the breakthrough of the bond Fluctuation index and credit spreads.

Written by: Luke, Mars Finance

In April 2025, the Trump administration's tariff stick once again stunned the global market. U.S. stocks plummeted, and cryptocurrency assets were bloodied, with Bitcoin dropping more than 10% in two days and Ethereum plunging 20% at one point, with liquidation amounts reaching as high as $1.6 billion within 24 hours. Investors were anxious and turned their eyes to the Federal Reserve, hoping for interest rate cuts to save the market. However, the Federal Reserve's silence was unsettling: where exactly is the critical point for rate cuts? Under the dual pressure of inflation concerns and economic strain, when will the Federal Reserve ease its policies? This is not only a data game but also a contest of market confidence and macroeconomic strategy.

Historical Reflection: The Trigger Code for Interest Rate Cuts

The Federal Reserve's decision to cut interest rates has never been arbitrary, but rather a well-considered choice in times of crisis or economic turning points. Looking back at key moments in recent years, we can extract the triggering logic of interest rate cuts from historical scripts, providing a reference for the current tariff crisis. Below is a detailed analysis of three landmark interest rate cuts, revealing the environment and motivations behind them.

2008 Financial Crisis

• Background of Emergency Rescue for Systemic Collapse: In September 2008, the bankruptcy of Lehman Brothers ignited a global financial tsunami, and the subprime mortgage crisis exposed the fragility of the U.S. real estate bubble. The interbank credit market froze, the S&P 500 saw a yearly decline of 38.5%, and the Dow Jones Index plummeted by 18% in a single week in October. The unemployment rate surged from 5% at the beginning of the year to 7.3% by the end of the year, and it climbed to a peak of 10% in the following year. The VIX panic index soared above 80, while the dollar LIBOR-OIS spread skyrocketed from 10 basis points to 364 basis points, indicating that interbank trust was nearly shattered.
• Rate cut action: The Federal Reserve first cut rates by 50 basis points in September 2007, lowering it from 5.25% to 4.75%. Subsequently, in 2008, they accelerated their actions, cutting rates a total of 100 basis points in two occasions in October, and then further lowering it to the ultra-low range of 0%-0.25% in December, while also launching quantitative easing (QE) to inject trillions of dollars in liquidity into the market.
• Trigger password: Systemic financial risks (bank failures, credit freezes) and economic recession (consecutive negative GDP growth). Inflationary pressures were quickly concealed in the early stages of the crisis, with core PCE falling from 2.3% to 1.9%, creating room for interest rate cuts. The Federal Reserve prioritizes financial stability and employment, making a "zero" interest rate inevitable.

Trade War in 2019

• Background of the Buffer Strategy for Preventive Rate Cuts: In 2018-2019, the China-U.S. trade war escalated, with the U.S. imposing tariffs on Chinese goods, putting pressure on the global supply chain. The U.S. GDP growth rate slowed from 2.9% in 2018 to 2.1% by mid-2019, and the Manufacturing PMI fell below 50 to 47.8, indicating a contraction in economic activity. The S&P 500 experienced a decline of 19% at the end of 2018, and the yield curve of 10-year and 2-year U.S. Treasury bonds inverted, signaling a recession warning. Business investment confidence declined, but the unemployment rate remained stable at a low level of 3.5%.
• Interest rate cuts: In July 2019, the Federal Reserve cut interest rates by 25 basis points, lowering it from 2.25%-2.5% to 2%-2.25%. In September and October, it cut another 25 basis points each time, ultimately lowering it to 1.5%-1.75%, with a total reduction of 75 basis points for the year.
• Trigger password: Signs of economic slowdown (manufacturing contraction, declining investment) and global uncertainty (trade wars), rather than a full-blown recession. Inflation is moderate, with core PCE remaining around 1.6%, below the 2% target, providing room for precautionary rate cuts. The Federal Reserve aims to buffer external shocks and avoid a hard landing of the economy.

Impact of the pandemic in 2020

• Background of decisive intervention amid the liquidity crisis: In March 2020, the global spread of the new crown epidemic caused three circuit breakers in U.S. stocks on March 9, 12, and 16, with the S&P 500 falling by 9.5% in a single day, and the VIX fear index soaring to 75.47. The dollar liquidity crisis emerged, and investors dumped assets for cash, with DXY surging to a three-year high of 103 from 94.5. Crude oil prices crashed, WTI fell below $20, and the global economy was at risk of a shutdown.
• Rate cuts: On March 3, 2020, the Fed cut interest rates by 50 basis points to 1%-1.25%; On 15 March, another emergency rate cut of 100bps to 0%-0.25% and the resumption of large-scale QE led to a rapid expansion of bond purchases to hundreds of billions of dollars.
• Trigger password: Exhaustion of liquidity in financial markets (US Treasury sell-off, freeze in credit markets) and risks of economic standstill (lockdown measures leading to a sharp drop in demand). Inflation was ignored in the early stages of the crisis, with core PCE falling from 1.8% to 1.3%. The Federal Reserve prioritized stabilizing the markets to prevent systemic collapse.

These cases reveal that the Federal Reserve's interest rate cuts typically revolve around three core conditions:

• Inflation is low or controllable: Inflation was suppressed by crises in 2008 and 2020, and inflation was below target in 2019, paving the way for interest rate cuts.
• Economic pressure significantly increases: whether it's recession (2008), slowdown (2019), or standstill (2020), economic weakness is a key driver.
• Financial market collapse: systemic risks such as credit freeze (2008), liquidity crisis (2020), forced the Federal Reserve to act decisively.

Current Dilemma: The Tug of War Between Inflation and Turmoil

On April 7, 2025, the global market fell into panic due to Trump's tariff policy. Tech stocks in the US suffered a heavy blow, with the S&P 500 at one point dropping more than 4.7% during trading, and the crypto market also declined simultaneously. However, Federal Reserve Chairman Powell stated calmly last Friday: "The economy is still in good shape, and we will not rush to react to market turmoil." The core PCE inflation rate remains at 2.8%, above the 2% target, and tariffs may further drive up prices, casting a shadow over the prospects for interest rate cuts.

Meanwhile, market signals are intensifying the tense atmosphere. According to Tradingview data, the Bond Volatility Index (MOVE Index) broke through 137 points on April 8, marking a "seven consecutive days of gains," approaching the "critical line" of 140 points predicted by Arthur Hayes. Hayes has warned: "If the MOVE Index rises, leveraged government bond and corporate bond traders will be forced to sell due to increased margin requirements, which is a market that the Federal Reserve is determined to defend. Breaking through 140 is a signal of a liquidity injection after a crash." The current index is just a step away from this threshold, suggesting that pressure in the bond market is building.

Goldman Sachs analyst Lindsay Matcham pointed out that the widening credit spread could be another trigger for the Federal Reserve's action. If the high-yield bond spread rises to 500 basis points, difficulties in corporate financing and a weak labor market may emerge in succession, forcing Powell to shift towards easing as he did in 2018. Currently, the high-yield bond spread has reached 454 basis points, not far from the warning line, and the market senses the smell of risk.

External Voices: Consensus Amid Disagreement

The market has significant divergence in its assessment of the timing for the Federal Reserve's interest rate cuts. BlackRock CEO Larry Fink poured cold water on this, stating, "The likelihood of the Federal Reserve cutting rates four to five times this year is zero; interest rates may actually rise instead of fall." He believes that Powell's tough stance stems from stable non-farm payroll data and inflation concerns, making it difficult to exhaust policy "ammunition" in the short term. In contrast, Goldman Sachs predicts that if there is no recession, the Federal Reserve may cut rates three times consecutively starting in June to 3.5%-3.75%; if a recession is triggered, the cut could reach 200 basis points.

The Federal Reserve has also revealed anxiety internally. On April 8, Chicago Fed President Goolsbee stated: "The hard data of the U.S. economy is performing exceptionally well, but tariffs and countermeasures may lead to renewed supply chain disruptions and high inflation, which is concerning." This uncertainty has put policymakers in a dilemma: cutting interest rates may fuel inflation, while waiting may risk missing the window to rescue the economy.

The Critical Point of Interest Rate Cuts: Signals and Timing

Based on historical experience and current dynamics, the Federal Reserve may need one of the following conditions to manifest for interest rate cuts:

• Inflation Moderation: Core PCE fell to 2.2%-2.3%, and the tariff effect has proven to be controllable.
• Economic slowdown: Unemployment rate rises to 5% or GDP growth rate significantly slows down, tariff impact becomes apparent.
• Financial turmoil intensifies: MOVE Index breaks 140, or high-yield bond spreads exceed 500 basis points, accompanied by a stock market decline of over 25%-30%.

As of now (April 7, 2025), the CME "FedWatch" shows a 54.6% probability of a 25 basis point rate cut in May, with market expectations slightly ahead. However, the bond market has not fully priced in a recession, with the 10-year U.S. Treasury yield fluctuating between 4.1% and 4.2%, and a liquidity crisis has not yet emerged. The Federal Reserve is more likely to first utilize lending tools rather than immediately cut rates.

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Future Point Prediction:

• Short-term (May): If the MOVE Index breaks 140 or the credit spread approaches 500 basis points, combined with further declines in the stock market, the Federal Reserve may cut interest rates by 25-50 basis points earlier.
• Mid-term (June-July): The effects of tariffs become apparent in the data, if inflation falls and the economy slows down, the probability of interest rate cuts increases, potentially resulting in a cumulative reduction of 75-100 basis points.
• Crisis Scenario (Q3): If the global trade war escalates, leading to market failure, the Federal Reserve may urgently cut interest rates and restart QE.

The tariff crisis is like a stress test, testing the Fed's patience and bottom line. As Hayes argues, bond market volatility can be an "outpost" for rate cuts, while widening credit spreads can be a "trigger". At a time when markets are swinging in fear and anticipation, the Fed is waiting for clearer signals. History has shown that every plunge is the starting point for a remodel, and this time, the key to a rate cut may lie in the next jump in the MOVE Index, or a critical break in credit spreads. Investors need to hold their breath as the storm is far from subsiding.