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Key Takeaway
- Economists and traders upped their forecasts for Federal Reserve interest rate cuts in wake of President Trump's announcement this week of wide-ranging tariffs.
- Federal Reserve Chair Jerome Powell said on Friday that he was waiting to see the impact tariffs may have on the economy.
- The Fed has maintained its influential interest rate for the entire year, as it awaits more clarity about policies proposed by Trump’s administration.
As President Donald Trump revealed new tariff policies last week, economists have increased their predictions for Federal Reserve rate cuts.
However, Federal Reserve Chair Jerome Powell seems to be holding the "wait-and-see" line.
The majority of traders expected rate cuts in 2019. This was after the announcement of tariffs made on Wednesday. According to CME Group’s FedWatch, which forecasts rate movement based on fed fund futures trading, traders were pricing four rate cuts totaling a percentage point by the end the year. A number of economists also increased their forecasts for the Fed's rate cuts, though there isn't a strong consensus.
Powell, however, reiterated in a Friday speech to journalists at Arlington, Va. that the central bank will wait to see the impact of the new policies on the economy. In their last meeting members of the Fed’s policy committee predicted that they would reduce rates twice this year.
"It feels like we don't need to be in a hurry," Powell said Friday. "It's not clear to me at this time what the appropriate path for monetary policy will be."
After his remarks, traders still expected four quarter-point rate reductions before the end the year. The first was expected at the meeting of the policy committee in June. The traders are only pricing in a 28 percent chance of a reduction in early May when the policy meeting is next.
The Federal Reserve has kept its federal funds rate, which is a key indicator of the economy, at a range between 4.25–4.50% so far this year. Powell and his policy-setting peers have said that they are waiting for more clarity on policy changes, such as tariffs, before changing their trajectory.
However, economists warned that the tariffs announced in this week could lead to an increase in inflation and tip the country into a recession, which would result in a loss of jobs. If that were to happen, the Fed would be stuck between its dual mandate—to keep inflation low and employment high.
"The Fed is in a tough spot with inflation set to accelerate and the economy poised to slow," wrote Nationwide Chief Economist Kathy Bostjancic. "If the economy falls harder into a recession, then the Fed might decide to look through a 'transitory' inflation rise and cut rates more aggressively."
Powell acknowledged Friday a period of rising inflation and unemployment would be a challenge to the Fed. The main tool at the Fed's disposal to deal with either problem is the fed funds rate, which it would normally raise to quash inflation or lower to spur employment.
