The Federal Reserve is not expected to reduce interest rates at its upcoming policy meeting next week. However, futures markets indicate that a series of significant rate cuts could begin as early as June, depending on escalating concerns about a potential economic downturn linked to a trade war.
Traders are increasingly pricing in quarter-percentage-point reductions in June, July, and October, particularly in light of recent comments from U.S. President Donald Trump regarding ongoing tariff increases on countries such as China, Canada, and Mexico. Following these remarks, U.S. stock and Treasury yields fell, heightening fears of an impending recession.
Despite these market sentiments, Fed Chair Jerome Powell indicated on Friday that the central bank is not in a hurry to lower rates, citing a strong labor market and fluctuating inflation rates that are still on a path toward the Fed’s 2% target. He noted that there is a high degree of uncertainty concerning the impacts of President Trump’s trade, fiscal, immigration, and regulatory policies, which some economists believe could elevate prices and hamper economic growth in the short term.
In response to these complexities, Goldman Sachs economists have revised their U.S. growth forecast down to 1.7% while raising inflation expectations. This scenario poses a dilemma for the Fed: whether to maintain its policy rate in the current range of 4.25%-4.50% to manage inflationary pressures or to cut rates to support the labor market amidst potential economic deterioration.
While the market is leaning towards rate cuts, some analysts caution that the Fed may adopt a more cautious approach to avoid igniting inflationary expectations among households and businesses due to tariff-induced price increases. Tim Duy, chief U.S. economist at SGH Macro Advisors, emphasized the growing anxiety among Fed policymakers about balancing rate cuts with inflation risks, especially under pressure from the Trump administration.
The Fed has maintained its policy rate so far this year, despite having cut it by a full percentage point in 2024. Policymakers are set to review more data this week, including a job openings report and the Consumer Price Index for February.