As Federal Reserve officials signal that interest rates will remain unchanged, investors and economists are closely watching Federal Reserve Chair Jerome Powell’s remarks this week for clues on the factors and timing that might prompt the Fed to eventually take action. The Fed has now held four consecutive meetings without adjusting rates, a situation that could trigger another round of criticism from US President Donald Trump.
However, Fed policymakers have emphasized that they need the White House to address key issues such as tariffs, immigration, and taxation before they consider any rate changes. Additionally, Israel’s attack on Iran’s nuclear facilities has added another layer of uncertainty to the global economic outlook.
Despite a gradual slowdown, the US economy remains relatively healthy overall, and few expect the Federal Reserve to adjust interest rates in the near future. According to futures market pricing, investors currently anticipate that the Fed will not lower borrowing costs until at least September.
Seema Shah, chief global strategist at Principal Asset Management, noted, “In the absence of an urgency to cut interest rates at present, the safest approach is to hold back.” The Federal Reserve is set to announce its interest rate decision at 2 p.m. Eastern Time on Wednesday, June 18th, followed by a monetary policy press conference with Powell.
Uncertainty Persists
The market widely expects that Trump’s tariff measures could push up prices and slow economic growth, risks that Fed officials highlighted in their last post-meeting statement. This situation could eventually force the Federal Reserve to make difficult choices, as economic conditions are pulling in different directions.
David Hoag, a fixed-income portfolio manager at Capital Group, said, “I don’t think there is anything to worry about at present.” However, he added that the longer the uncertainty persists, the more concerned he is that economic fundamentals could deteriorate, whether for consumers or businesses. So far, there have been no clear warning signs in the economy prompting Fed intervention.
Stable Job Market and Price Data
Despite a slowdown in job growth, the unemployment rate has remained stable for three consecutive months, partly due to a sharp decline in immigration, which has also reduced the labor supply. The longer the unemployment rate remains stable, the longer the Fed can keep interest rates unchanged to guard against potential inflation rises.
Price data also show no cause for immediate concern. The core inflation rate in May was lower than expected for the fourth consecutive month. This news boosted US Treasuries last week, as the market anticipated multiple rate cuts this year. The yield on the two-year US Treasury note, which is highly sensitive to Fed policy, dropped by more than seven basis points to 3.96%.
However, officials may still need several months of data to understand how much of the tariff costs have been passed on to consumers. Israel’s air strikes on Iran could introduce further complications. Fed officials typically monitor energy price trends, but oil price shocks may affect inflation expectations.
New Predictions Draw Attention
The latest economic and interest rate forecasts released this week may provide useful guidance on the thoughts of Federal Reserve officials. This will be the first set of forecasts since Trump announced the full imposition of tariffs on April 2, “Liberation Day.”
Shah said that if officials predict that the unemployment rate this year will be significantly higher than the 4.4% they forecasted in March, it could signal that policymakers may cut interest rates before the fourth quarter.
Some Federal Reserve officials, including Fed Governor Waller, have expressed willingness to cut interest rates, believing that as long as inflation expectations remain stable, the impact of tariffs on consumer prices can be viewed as temporary. This aligns with market indicators, which also suggest that traders believe the price increases triggered by tariffs will be temporary.
However, Matthew Luzzetti, chief US economist at Deutsche Bank, warned that if Fed officials raise inflation expectations, the number of rate cuts this year could drop from two to one. Barclays strategists have also cautioned that such “hawkish” signals could emerge unexpectedly.
Fed officials may also simply keep their forecasts unchanged, given the significant uncertainty surrounding Trump’s policies.
“I would be surprised if there were significant fluctuations in these dot plots,” said Zachary Griffiths, head of investment-grade and macroeconomic strategy at CreditSights. Since the Fed released its forecast in March, “the situation has been like a roller coaster ride.” He added, “Overall, I think we might be in a similar situation.”
When Will the Federal Reserve Cut Interest Rates?
Some economists believe that the timing of the Fed’s next move will ultimately depend on how long it takes for Trump’s policies to be reflected in economic data and to what extent they raise concerns about an economic recession.
A Bloomberg survey of economists conducted from June 6th to 11th showed that 42% of respondents expect the Federal Reserve to keep interest rates unchanged until there are clearer signs of economic weakness.
Julia Coronado, founder of research firm MacroPolicy Perspectives and a former Federal Reserve economist, expects rate cuts to begin in October or December to address the more pronounced slowdown in the labor market that she anticipates will emerge by then.
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