Top Headlines
- It's a steady ride for now as the Federal Reserve is expected to keep interest rates unchanged at Wednesday's meeting, settlement in the familiar 4.25%-4.5% range since January.
- The odds of a rate cut are slim, just 1.8%, according to CME Group's FedWatch tool.
- Brace yourself, rate cut enthusiasts, as the Fed's stance for now is still "wait and see" in response to President Donald Trump's trade policy overhaul.
Anticipated Outcomes from the Upcoming Federal Reserve Gathering on Wednesday
If you're pinning your hopes on lower borrowing costs, you might want to hold on tight. The Federal Reserve is likely to maintain its current federal funds rate range in its meeting on Wednesday. With a mere 1.8% chance of a rate cut, according to the CME Group's FedWatch tool, the odds aren't exactly in your favor just yet. The Fed's mantra this year has been "wait and see." They're keeping their powder dry until they see how the economic dominos fall due to Trump's tariffs.
Economists are expecting the tariffs, first declared in April, to cause a spike in prices and toss a wrench into employment numbers, creating problems for the Fed's "dual mandate" which mandates keeping inflation in check and supporting employment using monetary policy.
While recent data shows inflation staying low and job growth steady, fears are mounting about the long-term impact of the tariffs. Business leaders and average Joes are concerned the tariffs might drive up the cost of living and hurt businesses in the coming months and years, potentially leading to a recession.
What's Coming Up for Rate Cuts?
For now, the Fed is keeping interest rates higher to cool down the remnants of post-pandemic inflation. With the Fed's preferred measure of inflation climbing 2.6% over the year in March, still above the Fed's goal of 2%, they might find themselves in a bind. The fed funds rate, their main tool for managing the economy, is a rough and ready instrument.
By lowering rates, the Fed can encourage borrowing and spending, but risks heating up the economy and triggering inflation. Alternatively, raising rates to tame inflation could slow down the economy and potentially increase unemployment. The Fed would be facing a tough choice between two halves of "stagflation."
Currently, traders predict about a 30% chance of a rate cut at the Fed's May meeting and a 70% likelihood of a cut in June, but the central bankers are holding their cards close. They're watching how the tariffs impact the labor market and global supply chains before making a move.
According to Douglas Porter, chief U.S. economist at BMO Capital Markets, "The FOMC will remain on hold awaiting more information on how the tariff shock is propagating through the labor market and global supply chains."
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Additional Factors to Consider
In making its decision on whether to cut rates, the Federal Reserve takes several factors into account:
- Economic Growth: Tariffs are causing unease about slowing economic growth, and the Fed is considering supporting the economy through rate cuts.
- Inflation: While new tariffs may escalate inflationary pressures, the Fed might prioritize economic growth over price stability, especially if growth is under threat.
- Market Sentiment: The Fed pays attention to market reactions, like changes in stock and bond yields, to gauge investor outlook on future growth and inflation.
- Consumer Confidence: A noticeable dip in consumer confidence adds to the economic unease that might sway the Fed's decision.
- Global Economic Conditions: The impact of tariffs on global trade influences the Fed's assessment, as they can affect U.S. economic activity and the broader international economic landscape.
The Fed's decision-making process hinges on its ability to strike a balance between supporting economic growth while minimizing the risk of inflation, all while navigating the shifting sands created by external factors like tariffs.
- The Federal Reserve's decision to maintain its current federal funds rate range is due in part to the uncertainty surrounding the long-term impact of tariffs on the economy.
- In order to cool down the remnants of post-pandemic inflation, the Fed is keeping interest rates higher at the moment.
- Traders are predicting a 30% chance of a rate cut at the Fed's May meeting, with a 70% likelihood of a cut in June, but the central bankers are holding their cards close, awaiting more information on how the tariffs impact the labor market and global supply chains.
- Business leaders and average Joes are concerned that the tariffs might drive up the cost of living and hurt businesses in the coming months and years, potentially leading to a recession.
- In making its decision on whether to cut rates, the Federal Reserve considers various factors such as economic growth, inflation, market sentiment, consumer confidence, and global economic conditions.
