The year 2022 was defined by relentless rate hikes, but today, we’re squarely in the middle of a cutting cycle.
Aside from Japan—where the Bank of Japan just raised rates by 25 basis points to 0.5%, the highest level in 17 years—most G7 countries, particularly in North America, are continuing to ease monetary policy.
For instance, the Bank of Canada recently lowered its overnight rate to 2.75% with a 25 basis point cut, citing concerns over a potential slowdown in economic activity due to rising trade tensions and tariffs imposed by the U.S.
Meanwhile, U.S. traders expect the Federal Reserve to resume rate cuts as a strong labor market and cooling inflation keep the soft landing narrative alive.
A soft landing refers to a scenario where the Fed successfully curbs inflation without triggering a recession—essentially slowing the economy just enough to stabilize prices without derailing growth.
With rate cuts back on the table, here’s a look at what Wall Street is anticipating—and some ideas on how to position a portfolio ahead of this shifting environment.
Why the Fed is Likely to Cut in June
Traders are increasingly betting that the Federal Reserve will begin cutting rates in June. According to Reuters, U.S. producer prices have remained flat while weekly jobless claims have declined, signaling easing inflation pressures and a still-resilient labor market.
Interest rate futures now imply about a 75% chance of a quarter-point reduction to the Fed’s policy rate by June, with markets pricing in three cuts in total for 2025.
At its core, cutting rates reduces short-term borrowing costs, making it cheaper for businesses and consumers to access credit.
The economic rationale is straightforward: when economic headwinds emerge, lower rates encourage spending and investment, helping to offset slowdowns.
And right now, the biggest headwind driving rate cut expectations? Trump’s tariff policies.
Trump’s Tariffs Are Pressuring the Economy
The belief that the Fed will cut rates largely stems from fears of an economic downturn driven by Trump’s aggressive trade policies. The administration has imposed broad 25% tariffs on key trade partners like Canada and Mexico, as well as Europe and China.
These tariffs increase the cost of imported goods, while reciprocal tariffs—retaliatory measures by other countries—make U.S. exports more expensive overseas, hurting American businesses that rely on international sales.
For businesses, tariff uncertainty creates major headwinds. Let’s take a restaurant chain as an example. If tariffs drive up the cost of imported beef, vegetables, or equipment, restaurant owners must decide whether to absorb the costs or pass them on to customers. Raising prices can hurt demand, while absorbing costs squeezes profit margins.
Either way, revenues fall, earnings shrink, and eventually, businesses may have to cut staff or delay expansion plans—hitting the broader economy. Multiply this across industries, and the risk of a downturn grows.
The Fed Is Stuck Between a Rock and a Hard Place
Trump’s aggressive foreign policy has also left the Federal Reserve with little room to maneuver.
Fed Chair Jerome Powell has indicated there is "no rush" to cut rates, pointing to a strong labor market and inflation that at 2.8%, while falling, still sits above the Fed’s 2% long-term target. However, the central bank is now facing a tough balancing act:
Keep rates between 4.25%-4.5% to ensure inflation stays under control.
Cut rates to counteract Trump’s damaging tariff policies and prevent economic weakness.
The Fed’s dual mandate—maximum employment and stable prices—means it must weigh inflation risks against the potential fallout from tariffs.
The challenge in the Trump era is that these policies create inflationary pressures (higher import costs) while also slowing growth (business uncertainty and weaker exports). The Fed may have no choice but to cut rates to cushion the impact—even if Powell would prefer to hold steady.
For investors, the key takeaway is clear: markets are betting on a June rate cut, but the Fed’s hand may be forced sooner if economic conditions deteriorate.
How to Position
Aside from the always-relevant advice to stay the course, focusing on high-quality assets backed by strong, stable cash flows is essential in a falling rate environment.
High-quality preferred stocks can be particularly attractive, offering a blend of fixed income and equity characteristics with stable dividends and lower volatility than common stocks.
Equity income strategies also stand to benefit, especially when the underlying portfolio is built on rigorous fundamental analysis with an emphasis on yield.
As rates decline, higher-yielding stocks become more appealing because their income stream offers a better relative return compared to fixed-income alternatives.
This shift in investor demand can drive up valuations, making dividend-paying stocks a strong option in a lower-rate world. With rate cuts on the horizon, quality and yield are likely to be key drivers of performance.
About Us
Jay D. Hatfield is CEO of Infrastructure Capital Advisors and is the lead portfolio manager of the Infrastructure Capital Bond Income ETF (NYSE: BNDS), InfraCap Small Cap Income ETF (NYSE: SCAP), InfraCap Equity Income Fund ETF (NYSE: ICAP), InfraCap MLP ETF (NYSE: AMZA), Virtus InfraCap U.S. Preferred Stock ETF (NYSE: PFFA), InfraCap REIT Preferred ETF (NYSE: PFFR) and private funds. Each month Infrastructure Capital hosts a monthly economic webinar; you can sign up to attend by visiting our website www.infracapfunds.com (important disclosures can also be found on the website). For a prospectus please reach out to us or visit the links above for each respective fund.
DISCLOSURE
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The information contained herein represents our subjective belief and opinions and should not be construed as investment, tax, legal, or financial advice. Investors should consider the investment objectives, risks, charges, and expenses carefully before investing. Please read the prospectus carefully before investing. For more information about the Fund, Fund strategies or Infrastructure Capital, please reach out to Craig Starr at 212-763-8336 (Craig.Starr@icmllc.com). The Funds are distributed either by Quasar Distributors, LLC or by VP Distributors, LLC, an affiliate of Virtus ETF Advisers, LLC. ICAP, SCAP, and BNDS ETFs are distributed by Quasar Distributors LLC. PFFA, PFFR, and AMZA ETFs are distributed by VP Distributors, LLC an affiliated of Virtus ETF Advisers, LLC.