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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.
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Financial markets are pricing in the expectation that the Fed will begin to cut rates in July.
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The Fed is tasked with keeping inflation low and employment high. The central bank could find itself in a dilemma if tariffs send both of those key economic indicators in the wrong direction, as economists predict.
If you’re waiting for borrowing costs to come down, the Federal Reserve is unlikely to make those dreams come true at its next meeting on Wednesday.
The central bank is widely expected to keep its key federal funds rate at a range of 4.25% to 4.5%, the same as it’s been since January. There’s just a 1.8% chance the Federal Open Market Committee will cut interest rates, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data.
The Fed’s mantra this year has been “wait and see.” 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, which took effect in April, will push up prices and hurt employment, which would have implications for the Fed’s “dual mandate” to keep a lid on both inflation and joblessness using monetary policy.
However, the most recent data showed that inflation stayed tame in March, and the job market held steady in April.
“The data were strong enough to allow the Federal Reserve to remain on the sidelines as it monitors the impact of tariffs on inflation and inflation expectations,” Nancy Vanden Houten, lead U.S. economist at Oxford Economics, wrote in a commentary.
Although hard data has been stable, economic forecasts and surveys warn of trouble ahead. Business leaders and private individuals say they’re fearful the tariffs will push up the cost of living and hurt business in the coming months and years, possibly even leading to a recession.
Currently, the Fed is holding interest rates higher than usual to snuff out the last embers of the post-pandemic surge of 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.”
Going forward, the Fed could find itself in a bind because its main tool for managing the economy, the fed funds rate, is a blunt instrument.
