Federal Reserve Maintains Cautious Stance on Rate Cuts Amid Tariff Concerns

• The Federal Reserve keeps interest rates steady because Trump’s tariffs are causing inflation concerns. 

• Fed officials now expect only two rate cuts in 2025 instead of the four cuts they planned earlier. 

• The central bank wants to see more economic data before making major policy changes.

The Federal Reserve continues to hold interest rates steady as policymakers express growing concerns about inflationary pressures from President Trump’s tariff policies. Recent FOMC minutes reveal deep uncertainty among officials about the timing and magnitude of potential rate cuts in 2025.

Tariff Uncertainty Shapes Fed Policy

At their meeting earlier this month, Federal Reserve officials worried that tariffs could aggravate inflation and create a difficult quandary with interest rate policy. The minutes from the May 6-7 meeting show tariffs were expected to boost inflation this year and provide a smaller boost in subsequent periods.

Fed Chair Jerome Powell confirmed that the central bank would have cut rates by now if it weren’t for the substantial tariff policies implemented by the Trump administration. This acknowledgment highlights the significant impact trade policy has on monetary policy decisions.

The uncertainty surrounding tariff implementation has created challenges for Fed officials attempting to forecast economic conditions. FOMC members are somewhat split on the long-term effects of the Trump administration’s tariff policy on inflation, according to recent minutes.

Revised Economic Projections Signal Concern

Fed officials have adjusted their economic outlook based on tariff expectations. Policymakers expect higher tariffs to provide a moderate boost to inflation, with the headline PCE inflation projection revised up 0.3ppt to 3% y/y in Q4 2025.

Compared with the March projections, members expect lower economic growth, higher inflation, and a higher unemployment rate for 2025. These revisions reflect the Fed’s assessment that tariffs will create headwinds for economic performance while potentially stoking price pressures.

The central bank has scaled back its rate cut expectations considerably. On average, Fed officials predict they will cut the fed funds rate twice in 2025, rather than the four cuts anticipated in September. This more conservative approach reflects the Fed’s cautious stance amid trade policy uncertainty.

Market Expectations vs. Fed Caution

Despite the Fed’s cautious approach, some market participants remain optimistic about potential rate cuts. However, a rate cut in July seems unlikely and would be difficult for the Fed to defend given current economic conditions and tariff-related uncertainties.

Some Federal Reserve officials are joining President Donald Trump in calling for lower interest rates as soon as July, though this represents a minority view within the committee. Most Fed officials maintain that more data is needed before making significant policy changes.

President Trump has advocated for substantial rate cuts, arguing that the current policy is too restrictive. However, Federal Reserve Chair Jerome Powell says the impact of tariffs on inflation should become clearer in the coming months, suggesting the Fed will wait for more definitive economic data before acting.

The Federal Reserve’s approach balances supporting economic growth and maintaining price stability. With trade policy continuing to evolve and economic data showing mixed signals, the central bank appears committed to a measured approach to monetary policy adjustments throughout 2025.