Key Takeaways
- Officials at the Federal Reserve discussed the possibility of cutting the central bank's key interest rate as soon as June if the economy takes a turn for the worse.
- The Fed has a hold pattern and is keeping rates high in order to fight inflation. However, it could lower the rates to boost economic growth and prevent unemployment from rising.
- President Donald Trump's trade wars could push up inflation and hurt employment simultaneously, creating a dilemma for the Fed's monetary policy.
Federal Reserve is currently in a “wait and watch” mode. However, several Fed officials said this week the central bank might cut rates by June if economic indicators worsen.
Beth Hammack, President of the Federal Reserve Bank of Cleveland said that in an interview with CNBC, on Thursday, the Fed may cut interest rates by June if there are signs of an economy deterioration under President Donald Trump’s on-again-off-again tariffs.
Hammack said that if the committee has convincing data by June it will move in a direction if they know where to go.
Fed Governor Christopher Waller said on Bloomberg Television that the central banks interest rates could be cut if the labor markets collapsed, but he expected this to occur at least in July.
Waller said that it would not surprise him if you saw more layoffs or a slight increase in the unemployment rate if the tariffs were reinstated. “I’d expect more rate reductions, and sooner, if I saw a serious deterioration of the labor market.”
The Fed officials comments highlighted the central banks current dilemma while it waits to see whether there will be significant economic fallouts from Trump’s tariff war.
The Fed’s main job is to maintain low inflation and unemployment. Its primary tool, the federal funds rate, influences borrowing costs for all kinds of loans. The Fed can either boost the economy or reduce inflation by lowering this rate. Economists warn that Trump’s trade tariffs may increase inflation, while also affecting employment. Fed officials will have to decide which issue to tackle first.
The Fed has been in a holding mode, keeping the fed fund rate at levels above average to put out the last embers post-pandemic inflation. As of March, there was a resilient labor market with low unemployment and inflation was falling towards the Fed’s goal for a 2% rate. But officials are bracing themselves for a turn-around on both fronts.
According to CME Group’s FedWatch, which forecasts rate changes based on fed fund futures trading, investors expect the Fed to remain steadfast at its next policy committee meeting in May and to cut rates in June.
Correction, April 25, 2025: A previous version of this article misidentified the Federal Reserve's dual mandate. It's to keep inflation and unemployment low.
