The US Federal Reserve is widely expected to extend a recent pause in rate cuts this week, as it waits to see how US President Donald Trump’s stop-start tariff rollout affects the health of the world’s largest economy.
Most economists expect the tariffs introduced by Trump since January to push up prices and cool economic growth, at least in the short run, potentially keeping the Fed on hold for longer.
“The Fed has to be very focused on maintaining inflation so that it doesn’t start moving back up in a more persistent way,” said Loretta Mester, who recently stepped down after a decade as president of the Cleveland Federal Reserve. “That would undermine all the work that was done over the last three years of getting inflation down.”
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The Fed has held its key interest rate at between 4.25 percent and 4.50 percent since December last year, as it continues its plan to bring inflation to the bank’s long-term target of 2 percent, with another eye firmly fixed on keeping unemployment under control.
Recent data point to inflation hitting that target ahead of the introduction of Trump’s “Liberation Day” tariffs, while unemployment has remained relatively stable, hugging close to historic lows.
At the same time, various “softer” data points such as consumer confidence surveys have pointed to a sharp decline in optimism about the health of the US economy — and growing concerns about inflation.
“Whether the economy enters a recession or not, it’s hard to say at this point,” said Mester, now an adjunct professor of finance at the Wharton School of the University of Pennsylvania.
“I think the committee remains in good condition here, and most likely they’ll remain on hold at this meeting,” former St Louis Federal Reserve president Jim Bullard said.
“I think it’s a good place for them to be while there’s a lot of turbulence in the trade war,” added Bullard, now dean of the Daniels School of Business at Purdue University.
Financial markets overwhelmingly expect the Fed to announce another rate cut pause on Wednesday, data from CME Group showed.
US hiring data for last month, published last week, came in better than expected, lowering anxiety about the health of the labor market — and reducing pressure on the Fed’s rate-setting committee to reach for rate cuts.
Economists at several large banks, including Goldman Sachs Group Inc and Barclays PLC, have delayed their expectations for rate cuts from next month to July.
“Cutting in late July allows the committee to see more data on the evolution of the labor market, and should benefit from resolving uncertainty about tariffs and fiscal policy,” Barclays economists wrote in a note to clients on Friday.
Other analysts see rate cuts happening even later, depending on the effects of the tariffs.
The rise in longer-run inflation expectations in the survey data points to growing concerns that tariff-related price pressures could become embedded in the US economy, even as the market-based measures have remained close to the 2 percent target.
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