Amid rising calls for rate cuts, the Federal Reserve is maintaining a cautious approach to monetary policy. Despite pressure from President Donald Trump and Treasury Secretary Scott Bessent, who advocate for lower interest rates, the Federal Reserve System is not expected to take immediate action. Inflation concerns continue to limit the central bank’s scope for cuts, especially in the short term. However, with the US economy showing signs of cooling, the possibility of substantial rate cuts in the second half of the year remains on the table.
Contents
Fed’s Decision to Keep Rates Unchanged
On May 7, the Federal Reserve is expected to keep interest rates steady. Fed Chair Jay Powell, in his latest remarks from April 16, emphasized the Fed’s “wait and see” approach. While unemployment remains relatively stable, Powell highlighted that strong labor market conditions cannot coexist with persistent inflation. He stressed that the Fed’s primary responsibility is to keep long-term inflation expectations anchored, thus signaling that immediate rate cuts are unlikely.
Fed Governor Chris Waller reinforced this position, suggesting that no rate cuts will occur at the May or June Federal Open Market Committee (FOMC) meetings. He explained that any impact from tariffs will not be fully visible in economic data until after July.
Economic Uncertainty Amid Weak Growth
Economic growth remains uncertain after a weak first-quarter performance. While first-quarter GDP contracted due to increased imports ahead of tariffs, subsequent months have shown a sharp decline in new orders for goods. The Port of Los Angeles CEO has warned of a significant drop in incoming shipments, and retail giants Walmart and Target have raised alarms over potential supply chain disruptions. These tariff-induced supply shocks could contribute to prolonged inflationary pressures, complicating the Fed’s decision-making on rate cuts.
With households concerned about rising prices and government spending cuts, the outlook for consumer spending and business investment is clouded. This may result in slower hiring and reduced investment, further limiting economic growth in the short term.
Rate Cuts Likely in the Third Quarter
The second half of 2025 could see significant rate cuts as the economy cools. While inflation is expected to remain above target in the short term, the decline in service-sector inflation and fading tariff effects suggest that the Fed may be able to target a return to price stability by late 2026. The Fed’s cautious stance will likely lead to rate cuts starting in the third quarter, with a base case of a 100 basis point reduction. Risks remain for a more aggressive rate-cutting response should economic conditions deteriorate more rapidly.
See more related articles:
- The fed takes cautious approach
- Cot report Japanese yen bulls face reversal
- USD/JPY rebound federal reserve decision impact
Fed’s Influence on Treasury Market
As a net buyer of Treasuries, the Fed continues to support the bond market, contributing to lower long-term interest rates. While no new changes are expected in the Fed’s approach to Treasury holdings, the central bank’s policy of gradually reducing mortgage-backed securities from its balance sheet remains in focus. This shift from MBS to Treasuries could bolster Treasury prices, supporting the broader market.
With the US Treasury constrained by the debt ceiling, the government is likely to spend down its cash reserves to finance operations, which will increase bank reserves and mitigate tightening liquidity. As a result, the Fed’s role as a net buyer of Treasuries continues to provide positive momentum for the bond market.
Limited Impact on the Dollar
Although the Fed’s actions typically influence the US dollar, the current market dynamics suggest that the dollar’s movement will be more closely tied to trade developments and economic data. With limited expectations for Fed rate cuts before the July FOMC meeting, the dollar’s direction will largely depend on updates from the US economy. The dollar may strengthen against the yen, as positioning in USD/JPY has become increasingly stretched, while EUR/USD is expected to remain in the 1.12–1.14 range.
Conclusion
While the Federal Reserve remains cautious about cutting interest rates in the near term due to ongoing inflation risks, a cooling economy in the latter half of 2025 could prompt significant rate cuts. Treasury markets continue to benefit from the Fed’s supportive stance, while the US dollar’s movement remains driven by broader economic factors.
About H2T Finance
H2T Finance delivers real-time financial news, keeping you up to date with market movements, policies, and global economic events. As part of H2T Media Group, we are committed to providing accurate information and in-depth analysis, helping investors make quick, confident decisions in an ever-changing financial landscape.
For inquiries or personalized assistance, feel free to contact us:
📞 Phone: +84933.948.888
📧 Email: [email protected]
📍 Address: 4/567 Tổ 10 Khu Phố Hòa Lân 1, Thuận An, Bình Dương, Vietnam
At H2T Finance, your success is our priority.
