The Federal Reserve (Fed) began its May 2025 meeting, which has been viewed as critical, under a politically charged environment featuring uncertainties related to the economy and anxiety from various industries. Even with President Trump’s constant demand for lowering interest rates and rising anxiety regarding high borrowing costs from the tech industry, industry experts believe the Fed will keep the interest rates on hold at 4.25%-4.5% (a rate unchanged since December 2024).

Fed Will Continue to Employ a Wait and See Approach

Such decisions come in the context of the US economy, which is like a double-edged sword. While the economy as a whole has a negative growth outlook with the country’s GDP during Q1 2025, there are positive signs for the labour market’s resilience. According to Wall Street’s economists, the situation is also further dampened by the Trump administration’s policies, particularly the new aggressive tariff regime that includes an eye-popping 145% import tax on goods from China. These have caused a rise in the cost of living for nominal GDP along with real GDP growth, which has been a concern in recent forecasts to cut the US GDP 2025 figure by more than 0.9% points and add an inflationary pressure of 2.3%, meaning every household would lose $3,800 in real purchasing power in a year.

Chair Jerome Powell and the Federal Open Market Committee (FOMC) hinted at a cautious approach driven by data. Much like Powell highlighted last month, the Fed has the luxury of waiting as they watch the impacts of tariffs and other policies ratified during Trump’s presidency. However, discounting rates could relieve some of the economic strain caused by the tariffs, but doing this too early could cause an increase in inflation.

“That’s a Fed that is going to have to wait for evidence and be slow to adjust on that evidence,”

said Vincent Reinhart, the Chief Economist at BNY Investments.

Political Pressure and Fed Independence

Trump has had some strong words on the matter, constantly criticising the Fed for not cutting rates, accusing it of being “too late and wrong,” and urging for cuts. Regardless, the Fed continues to practice their independence, refusing any appearance of surrendering to political influence. Some commentators argue that it is Trump’s public pressure that makes it more difficult for the Fed to cut rates, as they previously stated, the more they decide to cut rates, the more they will be seen as submitting to the whims of the administration. 

Market Expectations: When Will Cuts Come?

Financial markets demonstrate no change on the outcome of this week’s meetings, as FedWatch Tool has assigned a 99% likelihood on rates being unchanged. Looking ahead, most economists expect the first rate decrease to happen in July or much later, since it appears the Fed is waiting for stronger proof of economic slowdown or weakness in the labour markets. Some, like Nancy Vanden Houten from Oxford Economics, expect no action until December due to sticky inflation and a resilient job market.

The uncertainty surrounding the economic outlook is so unclear that it is affecting the trajectory of the Federal Reserve (Fed)’s policies. Goods that consumers spend the most on, including clothing, have been hit hard by Trump’s tariffs crossing the threshold of 1909. Now both businesses and households are slow to spend due to the uncertainty. The tech sector, alongside other leaders, is trying to push for some form of action, but for the Fed, inflation or loss of confidence in the Fed will come first. At the moment, citizens will have to hold on for lower costs of borrowing. There is no evidence available suggesting a recession and the Fed has no intention of renewing its data-based policy, which translates to power cuts based on economic cuts.