What to expect from the Federal Reserve Meeting on Wednesday

Key Takeaways

• The Federal Reserve is widely expected to hold its key interest rate steady on Wednesday, as officials wait to see how President Donald Trump's tariffs will ripple through the economy.
• The financial markets have priced in the expectation that Fed will start to cut rates by July.
• The Fed’s job is to keep inflation low and employment high. The Fed could be in a difficult position if tariffs cause both of these key economic indicators to go in the wrong direction as economists predict.

The Federal Reserve will not be able to fulfill your dreams of lower borrowing costs at its next meeting, scheduled for Wednesday.

It’s widely expected that the central banks will maintain its key federal fund rate at a level between 4.25% and 4.50%, which is where it has been since last January. According to CME Group’s FedWatch, which forecasts interest rate movements using fed funds futures data, there’s only a 1.8% likelihood that the Federal Open Market Committee (FOMC) will cut rates.

The Fed’s mantra for this year was “wait and watch.” Officials have said that attitude is unlikely to change until there is enough hard evidence of the economic effects of President Donald Trump’s rapid overhaul of U.S. trade policy.

Economists expect Trump’s tariffs that went into effect in April to push up prices and hurt the employment. This would have implications for Fed’s “dual mandate” to keep both inflation and unemployment under control using monetary policies.

However, the most recent data showed that inflation stayed tame in March, and the job market held steady in April.

In a recent commentary, Nancy Vanden Houten (lead U.S. economist for Oxford Economics) wrote that the data was strong enough for the Federal Reserve to monitor the impact of tariffs and inflation expectations.

Despite the fact that hard data is stable, economic forecasts are predicting trouble. Business leaders and private citizens are worried that tariffs will increase the cost-of-living and hurt businesses in the months and years to come, possibly leading to a depression.

So What's Next For Rate Cuts?

The Fed is currently holding interest rates higher that usual to snuff the last embers from the post-pandemic surge in inflation. The Fed's favorite measure of the cost of living rose 2.6% over the year in March, still above the Fed's goal of a 2% annual rate. The unemployment rate held steady at 4.2% in April, which Fed officials consider a sign the economy is at or close to "full employment."

The Fed may find itself in a difficult situation because the fed funds rate is a blunt tool.

The Fed can encourage borrowing by lowering interest rates. However, this could lead to an overheated economy and inflation. It can also do it the other way around, by raising interest rates, to control inflation but slowing the economy and causing an increase in unemployment. A stagnant and high inflation economy would force the Fed choose which half to attack first.

According to the FedWatch tool, traders believe the Fed will start cutting interest rates as soon as the economy begins to weaken in July. For now, central banks are likely to remain steady and wait to see which problem becomes more pressing.

Douglas Porter, chief U.S. economics at BMO Capital Markets and BMO’s chief U.S. economist, wrote a comment that stated: “The FOMC is on hold while it awaits more information about how the tariff shock propagates through the labor markets and global supply chain.”