Why Isn't the Fed Cutting Interest Rates? What To Know

Newsweek

5 days ago

Based on facts, either observed and verified firsthand by the reporter, or reported and verified from knowledgeable sources.
Stubborn inflation, a precarious job market and an economy that is yet to absorb the full impact of President Donald Trump's tariffs has put the Federal Reserve and its 12-person Open Market Committee in "wait and see" mode when it comes to bringing down borrowing costs.
But pressure continues to mount for the Fed and Chair Jerome Powell to cut rates from the current target range of 4.25–4.50 percent. Doing so could stimulate economic growth, and would be warmly welcomed by the White House and investors. But a rate cut—certainly the sizable one that Trump is hoping for—could drive up inflation and push the central bank further from its long-term two percent target.
Why Is There Pressure for a Rate Cut?
"American people want to borrow money cheaply, and they should be able to do that, but unfortunately, we have interest rates that are still too high," White House Press Secretary Karoline Leavitt said last month.
Criticism has been strongest from Trump himself, who has taken to calling the Fed's chair "too late Powell," as well as a "numskull," "dumb guy" and "Trump Hater." Since the beginning of his term, Trump has called for cuts to boost spending and reduce the interest paid by the U.S. on its debt, claiming that cutting "a couple of points" would save the federal government up to $900 billion a year in interest payments.
Federal Reserve Chair Jerome Powell testifies before the Senate Committee on Banking, Housing, and Urban Affairs on Capitol Hill on June 25, 2025, in Washington, D.C.
Federal Reserve Chair Jerome Powell testifies before the Senate Committee on Banking, Housing, and Urban Affairs on Capitol Hill on June 25, 2025, in Washington, D.C.Should he fail to oblige, Trump has threatened to replace Powell or install a "shadow" chair until his term ends in May next year. Those being considered for the task, according to The Washington Post, are Trump's economic adviser Kevin Hassett, Treasury Secretary Scott Bessent and Christopher Waller, a Trump appointee to the Federal Reserve Board of Governors.
While Trump's desire to oust Powell would face significant hurdles for violating the central bank's long-standing independence, his calls for a cut have been joined by a handful of Republicans as well as officials from within the Fed itself.
Michelle Bowman, who sits on the Board of Governors, said recently that the impact of tariffs on inflation could be less than originally anticipated, and that, "should inflation pressures remain contained, I would support lowering the policy rate as soon as our next meeting," which is scheduled for late July.
Why Is the Federal Reserve Not Cutting Rates?
"If you were to look just at a policy rule and the Fed's forecasts, they would justify multiple cuts this year," said Michael Pearce, deputy chief U.S. economist at Oxford Economics. "But the Fed is not on autopilot—they take into account the risks around the economy."
According to Pearce, inflation and the Fed's desire to at least get on a trajectory toward its two percent target is the main reason it remains in "wait-and-see mode," given the impact of tariffs on remains "in the pipeline."
While many have taken effect, reciprocal tariffs—arguably Trump's central weapon for addressing trade imbalances—have again been pushed back, to August 1. This week has also seen Trump unveil a host of new duties, but uncertainty over whether these will go into effect has again placed the Fed, and the economy at large, in wait-and-see mode.
Ryan Monarch, who served as a principal economist for the International Finance Division of the Fed's Board of Governors, told Newsweek that the impacts of tariffs on inflation data "have been more muted than expected so far," but that upcoming releases ahead of the September meeting will indicate whether that was the case in June and July.
Last week, Powell admitted that the central bank would have likely cut rates already were it not for tariffs and their still unrealized consequences. In their most recent meeting, members of Open Market Committee noted that clarity on the longer-term impacts of these will justify adopting a more restrictive or looser monetary policy.
The labor market, preserving the health of which is among the Fed's other central priorities, could also dictate whether and when a cut arrives.
Recent data has pointed to a stronger labor market, with the unemployment rate dropping and the economy adding more jobs than expected in June. However, Goldman Sachs' Chief U.S. Economist David Mericle wrote this week that, "while the labor market still looks healthy, it has become hard to find a job," echoing the fears of many that strong topline figures may be masking underlying frailty.
Pearce said that, for the Fed, "the upside risks to inflation loom larger than the downside risks to the labor market, justifying them remaining on hold."
"Once it becomes clear tariff-related inflation has peaked and we're back on a course toward two percent inflation, those risks could fade quickly and then the Fed would be behind the curve a bit, justifying moving a bit quicker," he added.
U.S. President Donald Trump signs the One Big Beautiful Bill Act into law during on July 4, 2025, on the South Lawn of the White House in Washington, D.C.
U.S. President Donald Trump signs the One Big Beautiful Bill Act into law during on July 4, 2025, on the South Lawn of the White House in Washington, D.C.Beyond tariffs, Thomas Hoenig, former president and CEO of the Federal Reserve Bank of Kansas City, told Newsweek that the potentially inflationary impacts of the budget— or "Big Beautiful Bill"—signed into law by Trump last week, could contribute to the Fed's cautious stance.
In terms of the political pressure the central bank is facing, Hoenig said that this may pull in two ways. "The Fed is an institution of individuals, who are not immune from this kind of political and related pressure," he said, noting its historic fondness for ease. However, he added that the Fed needs to "not appear to be caving to political pressure."
When Might the Fed Cut Rates?
According to the minutes of its most recent meeting, unanimously approved by all members, the Open Market Committee remains "well positioned to wait for more clarity on the outlook for inflation and economic activity" before considering a cut.
"A couple" of policymakers signaled openness to cutting interest rates at the late July meeting, with others argued the Fed can hold off until the end of the year, a split which highlights the "meaningful" upside risks to inflation, but also expectations that the economy can "remain resilient."
"We've stuck to our long-held view that the Fed won't cut until December," said Pearce. "With the risks to inflation all to the upside in the second half of the year, from tariffs, fiscal policy, [to] a weaker dollar, wait-and-see is going to be the most comfortable place for Fed officials." He added that a "sudden weakening" of the labor market could "panic" officials into cutting rates sooner than they would otherwise.
Monarch believes the mid-September meeting is the "likely candidate" for when the Fed reaches a consensus on cutting rates, but that a flare-up in tariff-related tensions could push the central bank back into cautious territory.
He added that the size of any potential cut "depends both on how already enacted tariffs feed through into the economy, and also how much the ongoing trade war continues to escalate."
While Trump has called for "at least" a three-point cut, analysts believe the Fed is only likely to reduce rates by a fraction of that this year, if at all.
Goldman Sachs currently anticipates three 25-basis-point cuts in September, October and December for a terminal rate of 3-3.25 percent.
Hoenig believes the odds of a single, 50-basis-point cut are low, but that "the Fed could be open to such a cut" should unemployment rise suddenly to above 4.5 percent. Inflation falling to or below the two percent target could also prompt the Committee to pull forward its schedule, as could a "a financial surprise or crisis."
Pearce, too, currently expects a 25-basis-point cut, but told Newsweek the odds of a larger one have grown "because of the downside risks to the economy, and because the uncertainty is likely to prompt the Fed into waiting longer than it otherwise would."
For now, caution remains the Federal Reserve's watchword, as it monitors how tariffs, inflation and the labor market interact and feed into the overall health and trajectory of the U.S. economy.