Although the Fed will not cut interest rates at its policy meeting next week, if growing concerns about a trade war-induced economic slowdown come to pass, it may announce the first of several swift cuts to borrowing costs in June.
After U.S. President Donald Trump‘s comments last weekend regarding a “period of transition” as he increases tariffs on China, Canada, and Mexico, futures contracts that settle to the Fed’s policy rate were increasingly priced for quarter-percentage-point reductions in June, July, and October. At least that’s where the money is in the futures markets. Due to worries that his remarks hinted at an impending recession, U.S. stocks and Treasury yields also fell on Monday.
With the labor market remaining robust, inflation on a rocky path toward the U.S. central bank’s 2% target, and uncertainty surrounding the impact of Trump’s trade, fiscal, immigration, and regulatory policies, Fed Chair Jerome Powell stated on Friday that the U.S. central bank is not in a rush to lower rates.
According to economists, those initiatives might raise prices and, at least initially, slow down the economy. Economists at Goldman Sachs increased their inflation projection on Monday while lowering their U.S. growth forecast to 1.7%. In such a situation, the Fed could have to decide whether to lower rates to protect the labor market from deterioration or maintain pressure on inflation by maintaining its policy rate in the present range of 4.25% to 4.50%.
Some economists believe the Fed is slow-walking rate decreases to prevent tariff-inflated prices from boosting household and business inflation expectations, which could increase the likelihood of consistently high real inflation, even though markets are banking on the latter strategy.
“Despite a calm exterior, (Fed policymakers) grow increasingly anxious about the rising risks to both sides of the mandate and the institution’s ability to resist pressure from U.S. President Donald Trump to cut rates should the labor or financial markets begin to slide before the Fed can gauge the inflationary impacts of not just tariffs, but the entire Trump agenda,” Tim Duy, the chief U.S. economist at SGH Ma wrote in an email. “A slow-to-react Fed will draw the ire of the Trump administration.”
After lowering its policy rate by a whole percentage point in 2024, the Fed has left it unchanged this year. With the release of the Consumer Price Index for February on Wednesday and a report on job vacancies due on Tuesday, policymakers will have more information to sort through this week.