The Federal Reserve has decided to pause its interest rate cuts, keeping the benchmark rate at 4.25% to 4.5%. This move reflects concerns over stubborn inflation and the uncertainty surrounding President Donald Trump’s economic policies.
Source: Trading Economics
While inflation has slowed from its peak, it remains above the Fed’s 2% target. At the same time, Trump’s proposed trade and immigration policies have introduced new risks that could influence inflation and economic growth in unpredictable ways.
The central bank now faces a difficult question: stay patient, wait for more data, or act preemptively to steer the economy.
Inflation Stalls While the Fed Waits
Inflation has come down significantly from its highs in 2022 and 2023, but progress has slowed. Recent data shows inflation hovering around 2.9%, slightly up from previous months. While this is far better than the 9.1% peak in mid-2022, it is still above the Fed’s comfort zone.
Source: Trading Economics
In its latest statement, the Fed removed previous language suggesting inflation was making “progress” toward its 2% goal. Instead, it acknowledged that inflation remains somewhat elevated, signalling that officials are not convinced that the problem is behind them.
At the same time, the labour market remains strong. The unemployment rate is at 4.1%, and while job growth has slowed, layoffs remain low. This resilience has given the Fed little reason to rush into more rate cuts, as the economy is still functioning relatively well.
However, some economists argue that waiting too long could create a delayed reaction. If inflation remains sticky while growth slows, the Fed could find itself in a tough spot, forced to cut rates later than it ideally would.
Trump’s Policies Add Another Layer of Complexity
The Fed’s decision is not happening in isolation. Trump’s proposed tariffs, tax cuts, and immigration policies could all have a direct impact on inflation and economic stability.
One of Trump’s biggest proposals is higher tariffs on imports, which would likely raise costs for businesses and consumers. If imposed, these tariffs could push inflation higher, forcing the Fed to keep rates elevated for longer—or even consider raising them again.
On the labour side, Trump has promised to deport millions of undocumented immigrants, which could lead to labour shortages in key industries. This would likely drive up wages and add further pressure on inflation.
Meanwhile, Trump has been vocal about wanting the Fed to cut rates immediately. He argues that lowering borrowing costs would stimulate economic growth, especially if oil prices fall.
However, the Fed is an independent institution and has made it clear that its decisions are driven by data, not political pressure. Powell’s response to Trump’s demands was measured, emphasizing that the Fed will act based on economic conditions, not external influences.
The Fed’s Policy Dilemma: Wait or Act?
The Fed now finds itself at a policy crossroads. Cutting rates too soon could risk reigniting inflation, especially if Trump’s tariffs and immigration policies drive prices higher.
But waiting too long could slow the economy unnecessarily, particularly if inflation continues its downward trend.
If inflation softens while job growth remains stable, the Fed could move forward with gradual rate cuts later this year. However, if inflation starts rising again, the Fed may have to hold rates steady for longer, or even hike them again, an outcome that markets are not fully prepared for.
The challenge is that there are too many unknowns. Trump’s policies are still being shaped, inflation remains unpredictable, and global economic conditions could shift at any time. The Fed has made it clear that it will wait for more data before making its next move.
Conclusion
The Fed’s decision to pause rate cuts signals that policymakers are not yet confident that inflation is under control.
With Trump’s economic policies adding uncertainty to the outlook, the central bank is opting for a wait-and-see approach rather than making preemptive moves.
Over the coming months, inflation data, job market trends, and Trump’s policy decisions will determine the Fed’s next steps.
If inflation slows further, rate cuts could return to the table. But if tariffs and labour shortages push prices higher, the Fed could be forced to maintain high rates longer than expected.