The US Federal Reserve is expected to maintain its current interest rates at its upcoming policy meeting, as economic uncertainty surrounding President Donald Trump’s policies continues to unfold. The central bank is taking a cautious stance, weighing the impact of new tariffs, cost-cutting measures, and potential tax cuts on the broader economy.
Since the start of the year, the Trump administration has imposed tariffs on major trading partners, including Canada, Mexico, and China, as well as on steel and aluminum imports. These moves have unsettled financial markets, fueling concerns that the world’s largest economy could be heading toward a slowdown. At the same time, aggressive budget reductions and promises of future tax cuts have added another layer of unpredictability to the economic landscape.
Despite these developments, Federal Reserve Chair Jerome Powell has emphasized that policymakers will focus on the overall impact of these changes rather than react to individual policy shifts. Speaking earlier this month, he stressed the importance of a measured approach, stating, “We do not need to be in a hurry, and we are well positioned to wait for greater clarity.”
Analysts widely predict that the Fed will hold its benchmark interest rate steady at 4.25% to 4.50%, just as it did in January. According to Gregory Daco, chief economist at EY, the central bank has been signaling a “wait-and-see approach,” with officials expressing little urgency to alter policy until they better understand how recent economic shifts will unfold.
Michael Pearce, an economist at Oxford Economics, believes the Fed is unlikely to overreact to early inflationary trends or signs of economic weakness. The central bank has historically raised rates to control inflation while lowering them to stimulate growth. However, with conflicting economic signals, the Fed finds itself in a delicate balancing act.
Analysts at ING predict the Fed will maintain its base case of two 25-basis-point rate cuts later this year but see no immediate reason for additional reductions. The labor market remains relatively strong, with unemployment at 4.1% in February, while inflation, measured by the consumer price index, came in at 2.8%—higher than the Fed’s 2% target but cooling slightly.
Inflation is expected to remain elevated for the rest of the year due to tariff-driven price pressures, ING analysts warned. They also cautioned that the Trump administration’s continued push to bring manufacturing back to the US could further escalate trade tensions, potentially leading to more price increases.
Pearce believes the economy is resilient enough to withstand the impact of tariffs without forcing the Fed to adjust rates immediately. However, he noted that if economic conditions deteriorate further, the central bank may be compelled to act sooner than anticipated.
Daco pointed out that Powell will have to navigate policy uncertainty and market volatility carefully during his post-meeting press conference. Private sector activity has shown signs of slowing, stock markets have been under pressure, and GDP growth in the first quarter is expected to weaken due to lower consumer spending.
While Powell has previously reassured the public that the economy is stable and does not require immediate intervention, Daco warned that shifting economic conditions could force the Fed to pivot its stance quickly. If growth weakens significantly, the central bank may adopt a more accommodative approach, while persistent inflationary pressures could push policymakers toward a more aggressive stance.
With uncertainty looming, the Fed’s path forward remains fluid, and its decisions in the coming months will be closely watched by investors and economists alike.