Washington (AFP) – The US central bank is expected to hold interest rates steady Wednesday after its key policy meeting, as officials gauge the impact of tariffs on inflation — and despite President Donald Trump’s calls for rate cuts. The Federal Reserve has kept the benchmark lending rate unchanged this year at a range between 4.25 percent and 4.50 percent, and analysts expect policymakers will remain on the sidelines until price increases cool sustainably.
While Trump has imposed a 10 percent tariff on most US trading partners and steeper levies on imports of steel, aluminum and autos in recent months, these have not triggered a price surge so far. This is partly because Trump has backed off or postponed some of his most punishing salvos, while businesses in turn have relied on existing inventory to avoid hiking consumer costs immediately. In May, the consumer price index edged up to 2.4 percent on-year from 2.3 percent in April, underscoring the limited effect of levies for now.
But economists expect it will take several months for tariffs to flow into consumer prices, and the Fed is proceeding cautiously with interest rate adjustments. “The Fed would no doubt be cutting again by now if not for the uncertainty regarding tariffs and a recent escalation of tensions in the Middle East,” said KPMG senior economist Benjamin Shoesmith. The prospect of higher inflation will probably keep the central bank in “wait-and-see mode for much of this year,” he added in a note. Officials will want to see “if those factors trigger more than a transitory increase in prices,” he said.
Beyond inflation data, policymakers are also trying to keep expectations “anchored,” a state in which consumers expect price increases to remain low and steady. If there are widespread expectations of price hikes, inflation could rise as businesses increase customer costs and workers seek higher wages. On Wednesday, the Fed is also due to release its latest economic projections on growth, unemployment, and inflation. Analysts will monitor if the Fed still expects to make two more rate cuts this year as well.
For his part, Trump has repeatedly urged the independent central bank to slash rates, calling Fed Chair Jerome Powell “too late” in doing so and “a fool” for holding off further cuts at the bank’s May meeting. Trump has pointed to benign US inflation in arguing for interest rate cuts. More recently, he also cast such a move as a way for the country to “pay much less interest on debt coming due,” overlooking the fact that lower interest rates usually raise consumer prices.
Powell, however, has maintained that the Fed’s rate-setting committee would make its decisions based solely on objective and non-political analysis, the Fed previously said. The Fed chair has also defended US central bank independence over rates in his recent meeting with Trump. Despite Trump’s pressure, Allianz Trade North America senior economist Dan North expects Powell will not be too shaken by “saber-rattling.”
“Consumers are still spending, labor markets still creating jobs, although it is in fact slowing a little bit,” North told AFP. “Certainly, the health of the economy doesn’t beg for the Fed to cut rates,” he added. “So we think they’re on hold till the end of the year.”
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