Recent economic reports show some good news: inflation is easing, consumer confidence is improving, and the labor market remains stable with unemployment steady at 4.2%. However, a slight rise in jobless claims hints at some cooling in the job market.
These factors suggest the Federal Reserve could consider easing monetary policy. Yet, experts on Wall Street believe the Fed will hold off on cutting interest rates for now.
Loretta Mester, former Cleveland Fed president, said the key uncertainty is how the economy will perform in the second half of the year. While recent data looks positive, it is unclear if these trends will last. She emphasized that policymakers need more clarity before making any moves on rate cuts.
A major source of uncertainty is the ongoing impact of President Trump’s tariffs. Although many tariffs have been paused, baseline duties remain, and some specific tariffs on Mexico, Canada, steel, aluminum, and autos are still in place.
The US and China recently agreed on a framework to ease trade tensions, but details remain sparse, and effective tariff rates are still high. These tariffs could influence inflation and economic growth, making the Fed cautious.
Market expectations show that nearly 70% of investors predict the Fed will start cutting rates in September, with a smaller chance of cuts as early as July. However, the Fed is likely to keep rates steady at its upcoming meeting.
Brent Schutte, chief investment strategist at Northwestern Mutual, said any early cuts would require a significant weakening of the labor market. He also warned that the inflation threat remains, partly because the full effects of tariffs on prices may not yet be visible in the data. Schutte described the current period as a “wait-and-see” phase for the Fed.
HSBC economist Ryan Wang noted the “double-sided risks” of tariffs: rising goods prices could push inflation higher, but a cooling labor market might help reduce inflation pressures. Wang cautioned that the Fed needs confidence inflation is under control and that the economy is not slowing too fast before cutting rates.
For now, the Federal Reserve appears to be in a holding pattern—acknowledging positive signs but waiting for clearer evidence before changing course.
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