Northwestern Mutual Warns Against Premature Bets on Rate Cuts to Offset Tariffs

Northwestern Mutual’s Chief Investment Officer, Brent Schutte, cautioned in his latest weekly note that investors may be overestimating the ability of future interest rate cuts to neutralise the economic drag from newly imposed tariffs.

“Investors seem to be betting on upcoming interest rate cuts and counting on them to counteract the drag from tariffs. We think it is too early to make that assumption,” the CIO argued.

The warning comes after the Trump administration’s latest round of trade measures took effect, with imports from most countries now facing a 10 per cent levy, and much higher rates for key partners, 30 per cent on Chinese goods, 50 per cent on imports from India and Brazil, and a threat to raise EU tariffs to 35 per cent. 

The effective U.S. tariff rate has surged to 18.6 per cent from 2–3 per cent at the start of the year, according to the Yale Budget Lab.

Schutte told investors that signs of strain are emerging. He noted that July’s services sector data weakened as price pressures rose, while the latest U.S. jobs report was far weaker than expected. 

The CIO added that as of Thursday, August 7, Fed funds futures priced in a greater than 90 per cent chance of a September rate cut.

San Francisco Fed President Mary Daly has signalled readiness to lower rates, noting “the labour market has softened” and warning against further slowing.

Schutte said the timeline and magnitude of tariffs’ impact remain uncertain, and high equity valuations could amplify any negative shocks. 

He urged investors to maintain diversified portfolios to manage risks amid “a changing and unpredictable” market landscape.

“Uncertainty is a fundamental characteristic of the financial markets, and it is central to the potential for investment growth—it is a feature of investing, not a bug,” Schutte stated.  

“A diversified portfolio that is tailored to your particular needs, goals and circumstances can capture a wide range of opportunities and guard against a wide variety of risks without requiring you to predict them.”