The Federal Reserve was expected to not change interest rates Wednesday as it continued to assess the impact of President Donald Trump’s tariffs.
But despite Trump’s pressure on Fed monetary policymakers to cut interest rates to support the economy, it still faces the prospect of exacerbating inflation.
The central bank’s federal fund rate was expected to remain unchanged at a target of 4.25% to 4.5%. Rates are benchmarks for everything from car loans to credit cards and personal loans. Those rates are far above pre-pandemic levels, with credit card rates hovering at over 21%. Auto loan interest rates are falling more effectively.
Mortgage fees have little to do with federal funding rates and instead closely track government borrowing costs, which is also rising.
Investors believe the Fed will continue to stabilize through its next meeting in June, with the first cuts of 2025 coming in July.
The central issue of the Fed is determining how much tariffs will affect price growth in the future. At least one Fed official believes that price increases from tariffs are short-lived and are advocating for the start of rate cuts sooner.
It’s also how Trump feels. He set back the idea of firing Jerome Powell’s chairman, but he continued calling for lower interest rates after Friday’s employment report, although it showed that the US continued to add new jobs with healthy clips.
But most other Fed officials believe the wise move is to wait for interest rates to be cut until more serious deterioration occurs in the labour market. And while employment rates have slowed dramatically, layoffs have been curbed.
“The best thing they do is wait to see. Are they more of a problem with inflation and rising unemployment?” Ed Yardeni, head of the Yardeni Research Consultancy, said he was referring to the Federal Open Market Committee, which oversees monetary policy. “The evidence so far is that for now it is likely to be a cost issue rather than a labor market issue.”
Yaldeni hopes the market will remain “cranked” later in the year, but said Trump will ultimately be tolerant of his tariff gambit given the political calendar.
“Republicans can’t afford a recession with people who are upset by higher prices towards next year,” he said.
In terms of inventory, they are likely to remain at current levels except for a major recession, said Michael Antonelli, market strategist at Baird Private Wealth Management Group. The shock of Trump’s “Liberation Day” tariff announcement is exhausting, but investors may be waiting for hopes of a comprehensive “trade” signed by Trump.
Still, in contrast to larger institutions such as pensions and hedge funds, retail investors could be floating in the market. Bank of America data shows that even if the hedge fund is a net seller, individual individual customers are net buyers for 21 weeks and record buyers in the data history.
“It’s always the case that Americans buy,” Antonelli said. “They need to retire. They don’t get that much coverage, but from my perspective, they are the most important market players these days.”