Powell prefers to hold rates, despite pressure from the top

9 May 2025 , 11:50 AM

POWELL DOES NOT RELENT TO RATE CUT PRESSURE

After 100 bps rate cut between September 2024 and December 2024, the Fed has held status quo in 2025. In the March 2025 Fed meet, Powell had underlined that reciprocal tariffs carried substantial inflationary risks and hence the Fed was not in favour of cutting rates. He has almost given the same message in May, despite presidential pressure. 

Ironically, the Fed did have some supportive macro data ahead of the May 06-07 Fed meet. PCE inflation had tapered by 40 bps to 2.3%, while the first estimate of Q1-2025 GDP growth in the US saw -0.3% contraction. Despite these data points, the Federal Open Markets Committee felt that tariffs were too much of an uncertainty to permit rate cuts.

WHAT WE READ FROM THE MAY 2025 FOMC STATEMENT

Notwithstanding the political pressures, the FOMC opted to hold the rates in the range of 4.25%-4.50%. Here are key takeaways from the policy statement.

• FOMC held status quo on rates as the risks of higher inflation and unemployment had risen and clouded the US economic outlook, as policymakers grappled with tariffs. Powell, in his statement, underlined that tariffs had raised questions on whether the US economy will hold on, or wilt under the pressure of tariffs.
• Apart from the growth risk, the FOMC also saw major inflation risks due to tariffs. High tariffs by a country like the US, which ran a huge trade deficit, was inflationary. Powell felt that the impact was already visible in food prices, which had been spiking recently. This did add a layer of inflation risk to the US economy.
• The Fed statement added that the tariff regime had added to the macro uncertainty in the US. While tariffs were on pause, the punitive tariffs on China were already having an impact; being America’s largest trading partner. Hence, Fed had a limited role to play, till the full effect of reciprocal tariffs were visible.
• GDP contraction in Q1 was due to front-loading of imports ahead of tariffs. That may be temporary. However, if tariffs happened at a global level, then the impact on GDP, jobs, and inflation would be real. The Fed Biege Book had hinted at suspended business deals and falling demand.
• According to Powell’s statement, the current level of Fed rates (4.25%-4.50%) and the present monetary stance allows Fed to buy time and be prepared, should inflation spike and growth falter. The Fed needs tools available in its arsenal should there be a negative impact of the tariffs. Status quo, gives that choice to the Fed.

Jerome Powell was clear that the high level of uncertainty due to tariffs, made it difficult for the Fed to take an affirmative call on rates. Wait and Watch was the best option.

SO FAR, AND NO MORE, SAYS JEROME POWELL

In his post-policy statement, Powell underlined that as the fount of monetary policy, there was only so far it could go to accommodate the government. 

• Powell’s statement said it all, “We think right now the appropriate thing to do is to wait and see how things evolve, since there is just so much uncertainty.” Powell is right that the size and magnitude of tariffs are still evolving. A mix of punitive tariffs and trade deals could totally change the face of US trade.
• Most economists do not expect clarity on tariffs before the next policy statement in June, so status quo may continue in June too. On the contrary, the view is that the economic outlook could change more rapidly and frequently with regular changes to the tariff policies of the US government.
• Reacting to criticism on the Fed’s obsession with maximum employment, Powell clarified that employment and price stability have been the guiding principles of Fed policy. Fed policy had turned sharply dovish after the spike in unemployment in August last year, but that has stabilized since then.
• On questions about tariffs on China impacting supply chains, Powell warned that supply chains were entirely a fiscal issue. He also underscored that the Fed did not have any tools in its control to address supply chain issues. Hence, such a response should not even be expected from the Federal Reserve.
• Powell also stated that (barring Q1 contraction due to front-loading of imports), the US economy was in fine fettle. At least, that is what the hard data indicated. Hence, the Fed could afford to hold status quo for now. In fact, the language of the Fed statement suggested that the rate cuts were quite some time away.
• But the real uncertain factor is inflation. PCE inflation for March was subdued at 2.3%, but most economists believe that should tariffs come back after the pause, then inflation would spike to 4% by end of 2025. In short, Fed cannot afford to get caught on the wrong foot and stoke inflation. 

To sum up, there were distinct risks to growth and inflation, although the nature of risk was hard to quantify at this juncture. Powell is, perhaps, justified in preferring status quo!

IMMEDIATE RATE CUT PROBABILITIES HAVE FALLEN SHARPLY

The CME Fedwatch captures probabilities of rate moves at each upcoming Fed meet, based on implied probabilities of Fed Futures trading. 

Fed Meet	225-250	250-275	275-300	300-325	325-350	350-375	375-400	400-425	425-450
Jun-25	Nil	Nil	Nil	Nil	Nil	Nil	Nil	20.1%	79.9%
Jul-25	Nil	Nil	Nil	Nil	Nil	Nil	12.1%	55.9%	32.0%
Sep-25	Nil	Nil	Nil	Nil	Nil	10.1%	48.7%	36.0%	5.3%
Oct-25	Nil	Nil	Nil	Nil	7.0%	36.9%	39.8%	14.6%	1.6%
Dec-25	Nil	Nil	Nil	5.1%	28.7%	39.0%	21.5%	5.2%	0.4%
Jun-26	1.3%	6.3%	17.3%	27.6%	26.4%	15.2%	5.1%	0.9%	0.1%
Dec-26	3.8%	9.6%	19.3%	25.7%	22.6%	13.0%	4.7%	1.0%	0.1%

Data source: CME Fedwatch

For 2026, we have only considered two milestone meetings of June 2026 and December 2026. Here is what we read.

• It now looks like rate cuts are unlikely in June meeting also, with the first possibility of rate cut only in July 2025; that too with a probability of 68.0%.
• As of December 2025, there is an 94.4% probability that rates would be cut by at least 50 bps. So, the medium term outlook still remain dovish only.
• As of December 2026, there is 94.2% probability of 1 more rate cut in 2026 and 81.2% probability of 2 more rate cuts in 2026. That is fairly dovish for long term too.

The CME Fedwatch appears to be hinting at 2 rate cuts in 2025 and another 2 rate cuts in 2026. That is what even the Fed had suggested. However, between now and the end of 2026; a lot will depend on how the tariff story pans out!