The Federal Reserve is set to announce its first interest rate decision on Wednesday since President Donald Trump’s economic policies took hold.
The US Central Bank is expected to not change its fees as it waits to see how the president’s growing trade war, mass shootings of federal workers and other changes will affect the economy.
Many indicators suggest that consumer spending and employer employment are slowing, not to mention comments from Trump administration officials themselves. After the initial explosion of optimism during Trump’s election, growth now appears to be more subdued. Meanwhile, Elon Musk’s government efficiency cuts to the federal workforce raised concerns about pressure on the local economy, not to mention the ability of newly unemployed workers to receive unemployment assistance.
The drastic changes have increased uncertainty among investors. Last week, the S&P 500 slipped into the revised area, showing a 10% drop from its latest peak for the first time in three years.
As the investigation suggests that consumers and business trust is tanking, Trump and senior officials have changed their message since the campaign, warning consumers under the guise of potential economic pain and refused to rule out the possibility of a recession. Trump has shown that the economy could be during a period of “transition” as his policies take effect, but Treasury Secretary Scott Bescent recently said the US must “detoxify” from its dependence on public spending.
The upheaval created a more challenging background for the Federal Reserve to navigate to set US borrowing rates. Both are now quite calm. But there are indications that they’ll rise as the Trump administration appears to cut government agencies and impose a sudden new tariff that major businesses warn that shoppers can pay.
“They face the most challenging challenges central banks have ever faced when the shock is pushing prices up in terms of import costs and both job cuts,” former Treasury Secretary Larry Summers said in the X-Post Tuesday. “This is what the tariffs do.”
Summers calls the current economic trend “stagflation shock.” This shows that all pessimism, from the job market to the pace of price rise, is on the rise, and other economic commentators have reverberated.
So far, Federal Reserve Chairman Jerome Powell has settled down.
“Despite rising levels of uncertainty, the US economy remains in a good place,” Powell said earlier this month. “We don’t have to hurry, we’re in a good position to wait for it to become clearer.”
Still, investors expanding the first two months of the Trump administration believe it is likely that the Fed will keep the economy on track to cut interest rates at least twice this year. This is a huge change compared to the initial expectations of the year for a totally small number of people.
“The Federal Reserve is likely to boost policy (through lower interest rates) in the second half of 2025 as the economy weakens and labor market rifts spread,” Sheemashhah, chief global strategist for principal asset management, said in a note to clients on Monday.
That’s mainly because we haven’t seen the impact of Trump’s tariffs on prices yet, she said. Some analysts previously hoped that his hard-line trade proposal would be used as a negotiation tip with foreign governments rather than actually implementing it, but that view has recepped.
“The signal from the administration that it is not ready to eliminate the recession has exacerbated recent growth concerns,” Goldman Sachs analysts said in a note to clients on Sunday.
The White House may be waiting for the Fed to move its initial fees and support Trump’s economic agenda, said Neil Dutta, US economic director for consulting firm Renaissance Macros. He speculated in a note to his client on Monday.
“If the Fed is Hawkish, the market will probably be even weaker as a result. “If they’re flashy, they may encourage the administration to dial more heat.”