4 Reasons The Fed Isn’t Cutting Interest Rates

Here’s a question some Fed-watchers, including the President of the United States, have asked lately: Why won’t the central bank cut interest rates already?

Speaking at a press conference Wednesday, Federal Reserve Chair Jerome Powell gave at least four reasons why the central bank’s policy committee held its key interest rate steady, maintaining the same level it’s been at since December.

President Donald Trump is among the critics of the central bank’s recent monetary policy decisions and has repeatedly demanded that the Fed cut interest rates. A lower federal funds rate would put downward pressure on borrowing costs for credit cards, car loans, and other debt, giving some relief to household budgets and potentially boosting the economy and the job market.

The Fed has kept interest rates at a higher-than-usual level in an effort to snuff out the last embers of the post-pandemic inflation flare-up. Indeed, inflation has gradually fallen from its recent peak in 2022 and, by some measures, is nearly down to the Fed’s goal of a 2% annual rate. Not only that, but the past four monthly inflation reports have come in milder than forecasters had expected. Under such economic conditions, some observers have expected the Fed to cut interest rates.

So, why aren’t they? Here’s what Powell said when reporters asked him on Wednesday.

There Are More Tariffs Coming

The Fed’s main reason for its rate-cut reluctance is President Donald Trump’s unprecedented campaign of tariffs, which he has rolled out in fits and starts since February.

Powell and other Fed officials have said they expect the cost of the import taxes to be passed through to consumer prices, which could make for a nasty rebound of official inflation measures such as the Consumer Price Index.

They also expect Trump to announce more tariffs in the coming months. Trump has indicated he intends to place tariffs on pharmaceuticals, computer chips, lumber, and other products in addition to his existing tariffs on steel, aluminum, and foreign cars. Other key tariff deadlines are coming up, including the end of his 90-day pause on his widespread “Liberation Day” tariffs.

Powell said the Fed is awaiting the outcome of all these policies.

“There are many developments ahead, even in the near term,” Powell said. “We don’t yet know with any confidence where they will settle out.”

Inflation From Existing Tariffs Is Still On The Way

The cool inflation reports so far this year haven’t convinced Powell that the tariffs aren’t going to drive up prices. He said the tariffs, imposed starting in March, will take time to have an impact on consumer prices.

“We feel like we’re going to learn a great deal more over the summer on tariffs,” Powell said. “We hadn’t expected them to show up much by now, and they haven’t. And we will see the extent to which they do over coming months.”

Another big unknown is how much of the tariffs will ultimately show up in price tags. Businesses have indicated in surveys they’ll pass tariff costs along to their customers, but it’s unclear exactly how much that will push up inflation.

“The pass-through of tariffs to consumer price inflation is a whole process that’s very uncertain,” Powell said. “There are many parties in that chain. There’s the manufacturer, the exporter, the importer, the retailer and the consumer.”

The Job Market Is Rock Steady, For Now

A downturn in the job market could pressure the Fed to cut interest rates, even if inflation hadn’t yet been vanquished. That’s because the Fed’s job isn’t just to manage inflation, but to prevent a spike in unemployment.

Many economists believe the tariffs will hurt the economy and lead companies to lay off workers, pushing up unemployment, but so far, there’s been no sign of that in official job creation data. Indeed, Powell noted the most recent unemployment rate of 4.2% was very low by historic standards.

“You don’t really see unemployment going up,” Powell said. “4.2% is probably at the low end of estimates of the longer run sustainable level of the natural rate of unemployment.”

Low unemployment means the Fed has less urgency to cut rates.

“Because the economy is still solid, we can take the time to actually see what’s going to happen,” Powell said. “There’s a range of possibilities on how large the inflation effects and the other effects are going to be, so we’ll make smarter and better decisions if we just wait a couple of months.”

The Fed’s Job Is All About The Future

Just because inflation has looked rosy in recent months doesn’t mean the trend will last.

Fed forecasters expect that to change over the summer, and policymakers are taking those expectations into account, just as they did in March 2020, when the onset of the pandemic tanked the economy’s outlook.

“Monetary policy has to be forward-looking. That is elementary,” Powell said. “At the very beginning of the pandemic, we cut rates to zero immediately. Nothing had happened. We just knew that it was going to be really bad.”