Despite escalating political pressure, the Federal Reserve is widely expected to hold interest rates steady at its meeting on Wednesday, which would mark the fourth consecutive decision where rates remain unchanged.
Amid mixed economic data, disinflation, uncertainty from President Trump’s policies and Middle East tensions, the Fed remains cautious on interest rates. Global markets will watch Fed Chair Jerome Powell’s press conference for further insights on the outlook.
Despite Trump’s continued criticism of Powell and calls for lower interest rates, from the Fed’s perspective, the economy’s path is too uncertain to risk lowering rates too quickly.
Caution Remains
The Fed is widely expected to keep rates steady at 4.5%. The CME FedWatch tool indicates no rate cuts will take place until September 2025. Recent economic data supports the cautious stance as the labor market remains stable, and inflation has been on the decline for 4 straight months. ⁽¹⁾
The economy isn’t flashing warning signs that would prompt the Fed to intervene. Powell was clear in his post-meeting press conference last month that the Fed is prepared to take its time assessing the incoming economic data, particularly the impact of tariffs, before deciding on its next step. ⁽²⁾
President Trump’s tariffs are widely expected to raise prices and slow growth, risks that officials flagged in their last post-meeting statement. That could eventually force the Fed to make a difficult choice as the economy pulls them in opposite directions.
Economic Data
The unemployment rate has held steady for three months even as job growth has slowed. That is in part because of a sharp decline in immigration lowering the supply of workers. The longer the jobless rate remains stable, the longer the Fed can hold rates as a defense against potentially higher inflation. ⁽³⁾
In the US, jobs growth could slow as the private sector expects a decline in jobs from cuts due to Trump’s policies. Federal government jobs are also likely to shrink further as efforts led by Elon Musk to reduce government spending take effect.
The Federal Reserve’s recent Beige Book noted widespread uncertainty delaying hiring, with businesses reporting lower labor demand, fewer work hours, and plans for staff reductions. Trade uncertainty and concerns about consumer demand are making companies more cautious. The Beige Book also warned of price increases, which could fuel inflation.
Price data has also given little to worry about. Headline inflation rose by less than expected in May for the fourth straight month. Treasuries rose last week on the news, supported by bets on more than one rate cut this year. ⁽⁴⁾
Trump’s Tariffs and Global Uncertainty Create More Challenges for the Fed
Trump’s tariffs could continue to pose a threat to the Fed’s plans for maximum employment and low inflation. Tariffs are expected to reignite inflation and slow economic growth, which essentially could create a challenging environment for the Fed between keeping inflation low and supporting economic growth. If tariffs drive prices higher, the Fed might keep rates high with risks of weak job growth.
Fed officials are likely to wait for additional data to understand the extent of the tariffs’ impacts on consumers.
The Israel-Iran war will also raise additional questions. Fed officials traditionally look through energy price moves, but an oil price shock could affect inflation expectations.
New Forecasts and Policy Signals
The FOMC will release new forecasts on the economy and interest rates, the first since Liberation Day. These forecasts could clarify the Fed’s actions. If officials predict unemployment to rise meaningfully this year above the 4.4% they forecast in March, policymakers may look to cut rates before the fourth quarter. ⁽⁵⁾
Some Fed officials, including Governor Christopher Waller, have already signaled openness to cutting because they believe policymakers can view the expected impact of tariffs on consumer prices as temporary, as long as inflation expectations remain subdued. That aligns with market-based analysis, suggesting traders also believe the tariff price bump will be short-lived. ⁽⁶⁾
But should officials raise their expectations on inflation, that could reduce the number of cuts they project this year from the two seen in March, to just one. ⁽⁷⁾
Political Pressure and New Contender for Fed Chair
President Trump has continued to attack the Fed’s actions, demanding an immediate rate cut of 100 bps to dodge a recession. Meanwhile, the Fed is caught between stagnant growth and inflation still above their Fed’s 2% target.
A fourth straight meeting without a cut could trigger more criticism from Trump, who argues the Fed’s high rates threaten economic stability. Despite this, the Fed remains independent, and Powell has stayed silent on Trump’s comments. The decision to hold rates steady may further strain relations with the White House.
Rumors are growing inside and outside the Trump Administration suggesting a push for another name to serve as the next chair of the Federal Reserve – Treasury Secretary Scott Bessent. ⁽⁸⁾
President Trump said Friday he would name a successor soon to replace Jerome Powell, whose term as Fed Chair ends in May 2026. The small list of candidates under consideration also included Kevin Warsh, a former Fed official whom Trump interviewed for the Treasury secretary role in November.
But Bessent, who is leading Trump’s effort to kickstart the US economy with sweeping changes to trade, taxes and regulation, is now one of the contenders for the job. ⁽⁹⁾
