Keeping interest rates where they are for now looks like the right thing to do.
The Fed has cut its GDP growth forecast for 2025 from 1.7 percent to 1.4 percent (slightly lower than some expectations). That’s compared with GDP growth of 2.8 percent last year. Six months ago, the central bank was expecting 2.1 percent growth for 2025.
Forecasts are not infallible (far from it), but the declining trend in expectations (in March the Fed was forecasting 1.7 percent) is unwelcome, and it underlines just how poorly timed “liberation day” was. There was never any way that tariff increases on this scale could be implemented (or renegotiated) without significant disruption to consumer and corporate spending patterns and thus a slowdown in the economy.
To put (or try to put) the new tariffs in place on top of a slowing economy was thus . . . not ideal. If it did think things through, the administration presumably calculated that the hikes were best pushed through at the beginning of its term. This would give time for the surge in domestic investment it expects to see as a result of its new tariff regime to be showing some results by, oh, 2028.
The Fed also increased its expectations for 2025 personal consumption expenditures (PCE) inflation, a measure it watches carefully, from 2.8 percent (the March forecast) to 3 percent. Actual April PCE inflation was subdued at 2.1 percent. Tariffs appear to bear much of the blame for the increased forecast.
“Everyone that I know is forecasting a meaningful increase in inflation in coming months from tariffs because someone has to pay for the tariffs,” Powell said. “It will be someone in that chain that I mentioned, between the manufacturer, the exporter, the importer, the retailer, ultimately somebody putting it into a good of some kind or just the consumer buying it.”
“All through that chain, people will be trying not to be the ones who can take up the cost but ultimately, the cost of the tariff has to be paid. And some of it will fall on the end consumer.”
Indeed it will.
The Fed still expects there to be two rate cuts this year, but almost half the FOMC now want no rate cut. There is a general expectation that there will be fewer rate cuts than previously expected in 2026 and 2027.
The president’s response to the Fed’s message will, sadly, have been self-defeating.
Speaking to reporters at the White House before the Fed meeting, Trump unloaded on Powell. “We have a stupid person, frankly, at the Fed,” Trump said, continuing his drumbeat of name-calling that followed an Oval Office meeting between the two men last month.
“I’m nasty. I’m nice. Nothing works,” Trump said.
Trump said he wanted big rate cuts so that it will be easier for the U.S. Treasury to issue less expensive long-term debt. If the Fed’s inflation worries come true, then the Fed could raise rates, Trump said.
That seems optimistic. One of the reasons that interest rates have been stronger, and the dollar weaker, than expected has been reduced confidence in America’s fiscal position. Trump’s strong criticism of the Fed chairman (even allowing for his rarely understated rhetorical style) will increase concerns that he will try to install a more pliable replacement when Powell steps down next year. That will not increase the appetite for Treasuries, meaning that U.S. borrowing costs will be higher than would otherwise be the case.
Investors are also unlikely to be impressed by the president’s idea that the Fed could raise rates should its fears turn out to be justified. Leaving aside the inconvenient fact that inflation is already above the Fed’s target, one of the reasons that Bidenflation surged as high as it did was that the Fed was too slow to react.
The Fed is having to navigate some tricky waters (especially if stagflation is headed, as it might be, our way). Keeping rates where they are for now looks like the right thing to do.