U.S. President Donald Trump speaks as Jerome Powell, governor of the U.S. Federal Reserve and Trumps nominee as chairman of the Federal Reserve, left, listens during a nomination announcement in the Rose Garden of the White House in Washington, D.C., U.S., on Thursday, Nov. 2, 2017.

As the trade war heats up, the potential for the Federal Reserve to cut interest rates is rising, according to traders.

President Donald Trump, for one should like that. The president, in a tweet, called for a Fed interest rate cut, on the first day of the Fed's last meeting on April 30. He criticized the central bank and said it was holding back the economy.

On Monday, as stocks sold off, fed funds futures were pricing in a 100% chance of a quarter-point rate cut by December, and even a 60% chance of a cut by September, according to NatWest Markets. The market had been pricing in an 80% chance the Fed would cut interest rates by 25 basis points in December on Friday. By the end of next year, the market expects at least two rate cuts.

That's counter to the Fed's forecast of no moves at all this year, and one interest rate hike next year.

"The bond market is betting the Fed would have to come off the sidelines and cut interest rates this year," said John Briggs, head of strategy at NatWest Markets.

Following the Fed's last meeting, Fed Chair Jerome Powell said that the Fed does not see a reason to tighten or loosen policy, and that low inflation is likely transitory, a suggestion to markets that the Fed will not cut rates.

"We have [forecast] no Fed action through 2020, but the balance of risks point strongly to a cut rather than a hike," Briggs said.

Some market pros have been expecting an interest rate cut because in their view, the economy could need it before the end of the year. In fact, it there was an even more prevalent view several months ago, when markets feared a recession. Others take the view that the Fed will not move at all this year because the economy was improving.

Julian Emanuel, head of U.S. equities and derivatives strategy at BTIG, expects two rate cuts this year. He expects stocks to continue to sell off but to stabilize later and head higher.

"We do think that's ultimately part of the recipe that's going to stabilize stocks and eventually on anticipation of that event, stocks will climb back to 3,000," he said.



