The US Federal Reserve is widely expected to leave interest rates unchanged at its 7 May meeting, resisting mounting political pressure from President Donald Trump and Treasury Secretary Scott Bessent, who have both publicly called for immediate cuts. However, growing signs of economic weakness and persistent uncertainty over tariffs mean rate reductions remain a possibility later this year.
Despite a first-quarter contraction in US GDP and rising concerns over inflation and consumer sentiment, Fed Chair Jerome Powell has maintained a cautious stance. Speaking on 16 April, Powell said the Fed remains in a “wait and see mode,” citing risks that the recent spike in prices could become entrenched. “Our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem,” he said.
Fed Governor Christopher Waller echoed this sentiment, explicitly ruling out any move in May or June, noting that the 90-day pause in reciprocal tariffs means the economic data may not reflect the full impact until the second half of the year.
Inflation uncertainty and tariff-induced shocks
While headline inflation has moderated from its 2022 highs, it remains above the Fed’s 2% target. Core PCE inflation rose 2.6% in the year to March 2025, and analysts expect price pressures to remain elevated in the near term, especially as businesses pass on higher input costs from tariffs.
Goods inflation is likely to stay sticky due to disrupted global supply chains. Executives from Walmart and Target reportedly warned Trump of potential inventory shortfalls, while the Port of Los Angeles expects incoming cargo volumes to fall by more than a third year-on-year.
At the same time, households are growing nervous. Rising prices, cuts to government spending, and concerns over job security are weighing on consumer confidence and spending. Businesses are responding with caution—pulling back on hiring and investment—which could amplify the economic slowdown.
No move in May, but June cut in play
The futures market is pricing in just a 7% probability of a rate cut at the May meeting. However, expectations for a cut in June are growing. Peel Hunt economist Kallum Pickering noted that a move next week would be “a disappointment for the Trump administration,” but that a June rate cut is seen as better than even odds.
ING analysts similarly expect the Fed to remain on hold in May but foresee up to 100 basis points of cuts in the second half of the year—especially if core inflation starts to ease and economic conditions continue to deteriorate. Risks are skewed towards a more aggressive response if the economy weakens sharply.
Housing inflation could be a key swing factor. Rent inflation, which accounts for roughly 40% of the core CPI basket, is already slowing according to the Cleveland Fed’s tenant rent index. Combined with declining service-sector prices—particularly in travel and hospitality—this may pull overall inflation closer to target by early 2026.
Political pressure builds
President Trump has sharply criticised Powell in recent weeks, citing strong job numbers and “no inflation” as justification for rate cuts. While there had been speculation that Trump might attempt to remove Powell, the Fed chair’s term runs until May 2026, and Powell himself has said such a move would be unlawful.
Trump’s comments have nonetheless added to market volatility. His Treasury Secretary, Scott Bessent, has pointed to the inversion of two-year Treasury yields relative to the Fed funds rate as evidence the market expects easing. Analysts, however, caution that Powell is likely to push back against such pressure at the upcoming meeting.
Dollar and Treasury implications
Despite the Fed’s expected pause, the central bank remains a net buyer of Treasuries—providing a supportive backdrop for fixed income markets. The Fed recently reduced the pace of its balance sheet runoff and is looking to gradually shift its holdings from mortgage-backed securities to Treasuries. With the US Treasury constrained by the debt ceiling and drawing down its US$675bn cash reserves, reserve levels in the banking system are likely to rise, reducing near-term funding pressures.
Still, analysts believe the Fed’s stance may not significantly move the US dollar. With markets already pricing little easing before July, ING argues that any Fed commentary on 7 May is likely to be “equivocal,” with dollar movements more responsive to trade data and macroeconomic surprises.
Short-term, any delay in cuts could push down long-term Treasury yields, as markets price in weaker economic cushions ahead. Conversely, an earlier move could drive shorter yields lower, but with limited dollar impact given the complex interplay of tariffs, politics, and inflation uncertainty.
