Fed Signals Pause in Rate Cuts Amid Economic Uncertainty and Political Pressure
The Federal Reserve has indicated a pause in its aggressive rate cut strategy with the federal funds rate currently around 3.6% following three consecutive reductions. Despite some dissent, with three members urging no change, the Fed is adopting a cautious stance given ongoing inflation pressures and a weak labor market. The central bank projects only one rate cut likely in 2026, emphasizing that future decisions will be data-dependent.
Inflation is expected to slow to approximately 2.4% by the end of next year as the effects of tariffs gradually fade from inflation calculations. Chairman Powell noted that the policy rate has been lowered by 75 basis points since September and 175 basis points since the prior September, placing it within the neutral range. He underscored that the Fed will monitor how the economy evolves moving forward.
Markets had already priced in expectations toward 2026, with speculation mounting regarding Powell's upcoming departure in mid-May and who will succeed him. President Trump is advocating for a successor perceived to favor rapid rate reductions, raising concerns about the Fed's independence and potential shifts in policy direction.
Despite the announcement, financial markets showed little movement in the dollar or US bond yields. Twenty-year Treasury yields hovered near 5% amid ongoing rate-cut expectations. The Federal Reserve also highlighted the continuing impact of global factors, including the US-China tariff situation, on inflation readings and overall economic conditions.
