The Federal Reserve looks set to maintain its pause on interest rate cuts at its meeting this week amid President Trump’s ongoing trade war and geopolitical tensions that are roiling commodity markets.
Markets expect the Fed to keep interbank lending rates steady at a range of 4.25 to 4.5 percent, where they’ve been since January. The CME Fed Watch tool put the chances of a pause at 99.8 percent on Tuesday.
The mix of touchy economic data, frequent trade policy developments and international tensions will justify the expected pause, economists say.
“Uncertainty around the direction of inflation, a relatively stable labor market and fluctuating tariff policy are enough for the Federal Reserve to keep interest rates unchanged,” Jerry Tempelman, vice president of Mutual of America Capital Management, wrote in a commentary Tuesday. “Conflict in the Middle East presents another worry.”
Major economic indicators have been in a holding pattern for the past few months, with consumers and businesses behaving cautiously as President Trump’s trade war has played out.
The unemployment rate has held at 4.2 percent in its last three readings after ticking up slightly in February and March. There are about 7 million people looking for a job out of a U.S. labor force of 170 million.
Inflation has hovered between 2.3 and 2.4 percent since March. Price increases cooled from 3 percent down to 2.3 percent between January and April but ticked up to 2.4 percent in May — possibly the first upward move in the price level attributable to tariffs.
U.S. inventories take about three months to clear. Many economists have been predicting tariffs to show up in prices some time this summer, though they have yet to make a clear impression in the overall data.
Whether companies decide to respond to margin pressures from tariffs by increasing prices or lowering costs could be the motivating factor behind the Fed’s wait-and-see stance.
“The Fed finds itself waiting to see whether tariffs pose a greater risk to the employment or inflation side of its mandate,” Daniel Hornung, former deputy director of the National Economic Council, wrote in a commentary Tuesday.
While bilateral negotiations on trade and commerce are continuing with dozens of countries, the groundwork for an overall deal with China appears to have been laid. President Trump said last week the deal is “done,” though a formal announcement is still pending.
According to various reports, the overall tariff level on China looks to be set at 55 percent, encompassing a 10-percent general tariff, a 20-percent China tariff and a previous tariff on the country of 25 percent set during Trump’s first term that the Biden administration left in place.
As the Fed has kept rates elevated relative to historic lows, the higher price of financing has weighed on consumers and households.
Consumer debt levels are at record highs, close to $1.1 trillion. Delinquency rates on credit card loans are up above 3 percent, and delinquency on residential mortgages rose through last year and into the first quarter.
Thirty-year mortgage rates are at 6.84 percent, off a recent high above 7 percent reached in January.
The overall macroeconomic picture is one of gradually slowing growth, according to various predictions.
Global growth for 2025 was expected to drop to 2.3 percent from a 2.7-percent projection in the latest outlook from the World Bank released last week. The outlook for U.S. growth declined to 1.4 percent from 1.8 percent.
The Fed and the International Monetary Fund put long-term growth for the U.S. economy at 1.8 percent in their latest projections, a sizable downgrade from the 2.8-percent growth of 2024. Little change is expected as a result of tax and spending reductions that are now moving their way through Congress, according to an estimate from the Joint Committee on Taxation.
“We are in a slowing economy. We’ve got consumer debt at all-time highs, we’ve got delinquencies rising. You’ve got all the telltale signs,” Al Rabil, CEO of investment firm Kayne Anderson, told Bloomberg News on Tuesday.
President Trump has put pressure on Federal Reserve chair Jerome Powell to lower rates in order to stimulate the economy and reduce interest costs on sky-high public debt levels as clouds have gathered on the horizon.
“If we cut our interest by 1 point … we save $300 billion. If we cut it by 2 points, save … $600 billion a year — $600 billion because of one numbskull that sits here, [saying] ‘I don’t see enough reason to cut the rates,’” Trump said last week.
Adding another variable to the Fed’s policy mix is the current war between Israel and Iran, which saw a huge escalation over the weekend after Israel launched strikes against Iranian nuclear facilities and killed top military personnel and scientists.
This led to a major spike in oil and gas prices that could translate to general price increases more quickly than tariff levies.
After hovering since April between $60 and $65 per barrel, West Texas Intermediate crude oil shot up above $73 a barrel last week and is pushing higher. Brent crude was just below $72 per barrel in Tuesday trading.
Tensions have been flaring in the region since the October 7, 2023, attack on Israel by the political and military group Hamas, which prompted a large-scale assault on the Gaza enclave by Israel that has left tens of thousands of civilians dead and caused a humanitarian crisis.
In Gaza City last week, a bag of flour was sold for 1,600 shekels, or about $450, United Nations officials said Monday.
The conflict has involved Iranian-backed groups in Yemen and Lebanon. Security and political dynamics in the region led to regime change in Syria last year, where longtime leader Bashar al-Assad was ousted by opposition fighting forces.