Reasons the US Fed Might Delay Interest Rate Cuts Until July

Table of Contents Show

The US Federal Reserve is still waiting to see how the tariff shock plays out before changing interest rates.

As widely expected, the central bank kept rates unchanged at today’s meeting. Since being cut by 1 percentage point over the course of September to December 2024, the federal-funds rate has been maintained in a target range of 4.25%-4.50%. The rate had previously been at 5.25%-5.50% since July 2023—its rise from nearly 0% during the pandemic constituted the largest hike in over 40 years.

Even after last year’s cuts, rates are well above the pre-pandemic (2017-19) average of 1.7%. That’s set the expectation that they will eventually fall further. However, the timing for this has become highly uncertain, owing to the tariff shock.

Fed Waiting on Clarity Before Cutting Rates

Fed Chair Jerome Powell is not one to speculate, and he held an especially reticent press conference after the central bank’s latest meeting. He continually reiterated the need to “wait for greater clarity,” and made other statements to that effect.

Powell noted that before the tariff shocks, the US economy looked quite sound. Economic growth and the labor market were solid. Inflation was slightly elevated vs. the Fed’s 2.0% target (core PCE inflation was 2.6% year-over-year as of March 2025), but most economists expected this to resolve over the next year or so. This would have called for a gradual lowering of interest rates to more normal levels.

PCE Price Index vs. Core PCE Price Index

undefined

Most economists’ forecasts have been upended by the abrupt imposition of the largest tariffs in a century. The implications for monetary policy remain ambiguous.

How Will the Economy React to Tariffs?

There are two layers of uncertainty. The first concerns policy. Where will tariffs be two months from now (much less two years from now)? And will fiscal policy also shift? For instance, will tariff revenue be recycled into the economy as tax cuts or spending?

Second (and equally important) is uncertainty around how the economy will react to tariffs. To what extent will business and consumers cut spending? How much will domestic production be able to replace higher-cost imports?

As Powell observed, the conventional wisdom is that tariffs will have a negative impact on real GDP growth, probably causing unemployment to rise somewhat, and that they’ll push inflation upward. This creates tension between the two parts of the Fed’s mandate. Higher unemployment and a greater recession risk would call for a more aggressive reduction in interest rates than the previously expected path. However, higher inflation would call for higher interest rates.

When Will the Fed Cut Interest Rates?

It’s unknown which kind of impact will be greater. There’s a plausible scenario wherein the Fed has to keep rates at their current high levels for the next two years to combat inflation. There’s also a plausible scenario in which the Fed has to quickly cut rates by several hundred basis points to combat a recession. As Powell said, it’s much too early to tell “which way this will shake out.”

Right now, there’s very little hard data pertaining to the impact of tariffs. Key data for April will released in the coming weeks. Still, we’ll need at least two or three months of hard data on consumer spending, business investment, the labor market, and inflation to start to have a clearer picture of the effects of tariffs. It’s possible the data sends a strong enough signal to push the Fed to cut in June, but we think the first cut is much more likely in July.