The Federal Reserve will begin its 2-day meeting today, concluding with its interest rate decision to be released tomorrow. Expectations are pointing to a rate hold at 4.5%, with a press conference scheduled after the meeting.
The Fed will offer insights on how the US economy performed during the past few months and give their views on the economic outlook as trade war concerns and recession fears loom.
Caught Between Interest Rates, Sluggish Inflation and Weak Data
The Fed is facing a tough decision on balancing the economy between high interest rates, weak data and sluggish inflation. Since the Fed cut interest rates last year by 100 basis points, it has held rates steady at 4.5%. The Fed’s next move holds huge weight for markets.
The Fed is still committed to keeping rates high as inflation remains persistent. February CPI came in at 2.8%, which was lower than expected but showed inflation to be trending around this level. Persistent inflation could support a hawkish Fed as the central bank is already willing to keep rates restrictive. ⁽¹⁾
However, weak growth, rising risks of labor market weakness and weak services and manufacturing activity could cause the Fed to restart its rate cut cycle to provide stimulus to the economy. Rate cuts also carry the risk of boosting inflation. ⁽²⁾
Inflation remains in focus by the Fed. However, the central bank is still monitoring the rising risks of the labor market. Recent NFP data for February indicated that added jobs came up short at 151K, with the unemployment rate rising to 4.1%. ⁽³⁾
Recent federal layoffs have brought even more uncertainties, as government workers are facing job losses and a challenging private sector, marked by subdued corporate hiring and reduced middle-management roles. ⁽⁴⁾
Despite disappointing economic data, the Fed is in no rush to resume its rate cut cycle, as Chairman Powell has stated his optimism on the economy. However, with growth slowing, recession fears rising, and inflation remaining high due to tariffs, we could see more uncertainty ahead, not just in the US but also in the global economy. ⁽⁵⁾
Traders and investors expect the Fed to cut rates by 50 basis points this year, according to the CME Fed Watch. ⁽⁶⁾
Political Uncertainty and Tariffs
Trade wars add uncertainty to the global economy and might impact the Fed’s decision-making concerning interest rates. Trade wars could put pressure on the US economy as tariffs are known to drive inflation up, which might cause the Fed to hold rates higher for longer.
New trade war tensions have emerged between the US and Europe, where 200% tariffs were also imposed on European goods such as alcoholic beverage, along with 25% tariffs on steel and aluminum. President Trump also announced plans to impose tariff on European auto manufacturers. ⁽⁷⁾
US policies such as tax cuts and deregulation could benefit economic growth, but the focus has shifted on government spending cuts and trade protectionism, leading to concerns about job losses in both the public and private sectors.
The increased use of tariffs has further raised fears of rising costs for consumers and businesses, weakening overall sentiment and spending. ⁽⁸⁾
The Fed faces growing pressure from President Trump’s demand on lowering interest rates, but the Fed has been firm in its independence, stating that monetary policy decisions will be determined by the central bank and remain data driven. ⁽⁹⁾
