Why the Federal Reserve is ignoring a major economic warning

In other words, nobody knows what economic turns are coming next from the White House. That’s mostly because of the massive tariffs that Trump has slapped on nearly all American trading partners. The scale of these tariffs took nearly everybody by surprise, and the rollout has been unpredictable, to say the least.

Past performance isn’t a reliable indicator of future results

That kind of uncertainty has put the Federal Reserve under mounting pressure to lower rates to support the market. A lot of that pressure has come from President Trump himself. He has personally criticised Fed Chair Jerome Powell on Truth Social. In a post on 21 April, Trump called Powell ‘Mr Too Late’, urging him to lower rates now to avoid a slowdown.

But Jerome Powell isn’t taking that advice—at least not yet.

Powell has explained this cautious approach by pointing to uncertainty surrounding Trump’s tariffs and how they’ll affect prices—calling it a ‘wait-and-see’ approach until the impact of tariffs is clearer.

But why won’t the Fed just lower interest rates to support the market?

The Fed follows a dual mandate: stable prices and maximum employment. The goal is to maintain steady economic growth—not too fast, and not too slow. Economic expansion naturally ebbs and flows in a process known as the business cycle.

During periods of economic expansion, the economy grows, unemployment is low, and inflation typically rises. To prevent overheating, the Fed usually raises rates. That slows things down, helps cool inflation and may cause a modest rise in unemployment.

During contractions, the economy tends to face higher unemployment and lower inflation. This is when we typically expect the Fed to cut rates to stimulate the economy.

So, where do we stand today?

However, unemployment has been inching up since around mid-2022, when it sat at 3.6%. The high level of uncertainty is also having an effect on employment.

Let’s look back at the chart from earlier showing economic uncertainty. If we overlay the NFIB’s three-month hiring plans (inverted), we can see a strong link between uncertainty and hiring. The more uncertainty, the fewer companies plan to hire.

That could be a red flag.

The extreme level of policy uncertainty we’re seeing right now could accelerate the uptick in unemployment. That might put pressure on the Fed to lower rates sooner than planned—making borrowing cheaper, helping companies hire more and supporting employment.

And as hesitant as they are to cut too soon, they do have room to do so. The Fed funds rate currently sits at 4.3%, which is relatively high. That gives them flexibility to cut if they decide they need to stabilise markets or cushion a slowdown.

So, if they’ve got the firepower, why don’t they use it?

Despite concerns that tariffs could push prices up, inflation has actually been falling over the past year. But there’s another measure the Fed is watching: expected inflation. And that has already shot up because of the tariffs.

Just look at the one-year inflation expectations chart—it shows a sharp rise over the past six months. Consumers are clearly factoring in tariff-driven price increases. The Fed will be watching closely to see if this is just a short-term panic, or a longer-term issue.

If prices start rising again, the chances of a rate increase could go up. The Fed will be careful not to move too soon—doing so brings the risk of recession. But they also don’t want inflation to get out of control again.

As much as Trump wants the Fed to cut rates now, doing so too early could backfire. It might trigger inflation from both high tariffs and stronger consumer spending.

In the near term, we’re likely to see a cautious Fed—moving slowly and watching the data. As the tariffs take effect, they may have a clearer picture by the time of their meetings in mid-June or late July.

For better or worse, we’ll be keeping an eye on it. At Capital.com, we’ll continue to post videos to keep you informed on the latest market trends and financial news.

Explore more expert insights in our Educational Hub.

Create an account Try demo