The Federal Reserve is scheduled to extend its suspension of interest rate cuts on Wednesday amid concerns that President Trump's tariffs will unleash fresh inflation pressure and at the same time undermining growth.
The PAT decision will remain at levels from 4.25% to 4.5% in December after a series of cuts in late 2024. Federal Reserve Chairman Jerome H. Powell will soon hold a press conference.
For now, Fed officials are in standby mode. They closely track incoming data on signs that consumer prices keep them at bay after years of battle, or that otherwise a solid labor market is weakening. All they need is to make it clear exactly what Trump has in place for the economy after a whirlwind of tariff announcements, government spending cuts and deportation.
This is what you should look at.
Is it temporary or permanent? Trump's tariffs are widely expected to raise consumer prices, but the question is whether this will be a one-time increase or will it be fed into a more permanent inflation problem. The answer determines how the Fed will proceed carefully when it comes to interest rate cuts. “Our duty is to fully secure long-term inflation expectations and ensure that one-time price levels rise does not become an ongoing inflation issue,” Powell said in a speech last month. On Wednesday, he could face questions about the latest thinking about the Fed's inflation, which was more relaxed than expected in March.
Cutting hiber: As Trump's tariffs could rob inflation, central banks would be more likely to cut interest rates than otherwise lowering interest rates. Authorities have indicated they will not reopen their way of handling past recession outlook and will not resume interest rate cuts actively. In September, the Fed effectively weakened the labour market and took out insurance by cutting interest rates by half points. Also, in 2019, Trump cut interest rates three times as the world trade war with China during his first presidential term cooled business activities and began to consider sentiment. In both cases, inflation was much less risk of burning. The Fed doesn't have that luxury this time. Powell may provide more specificity about what the Fed needs to look at exactly to lower interest rates again, and how central banks can avoid the occurrence of policy errors.
Tricky tradeoffs: Compared to the current situation, past policy decisions seemed relatively simple. When inflation surged and labor markets overheated after the pandemic, there was little hand-held about the decision to sharply raise interest rates after the process began. In September, when inflation recedes and the labor market cools, authorities recognized the need to lower interest rates. Trump's economic agenda of cleaning up, cutting spending and massive deportation is risky while halting growth, a scary combination of central banks. Powell warned of the possibility that the Fed's goals for low, stable inflation and healthy labor markets could be strained with each other. Such outcomes would encourage central banks to make “very difficult decisions,” he said.
Unstable financial markets: Since the Fed's last meeting, financial markets have been whipping hard as Wall Street has struggled to digest the various twists and turns associated with Trump's trade policy. At some points last month, the typical correlations begin to collapse, indicating that financial markets are becoming tense. The most worrying development was the surge in US government bonds as the dollar weakened and the stocks were sold. Typically, the Treasury and the Dollar act as safe shelters at the time of financial disruption. The market has been stable in recent weeks, but the severity of previous movements has kept investors alive. Powell could be asked about the recent turnover and the conditions for the Fed to intervene if its volatility resurfaced.
