The Federal Reserve will issue its latest decision on interest rates on Wednesday, May 7.
Those hoping for relief on mortgages, credit cards, and other loans will likely be disappointed. The Fed is currently caught between a rock and a hard place, trapped by a dual mandate of low inflation and unemployment, goals that often contradict one another.
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Reducing interest rates shores up employment but triggers inflation, while raising interest rates reduces inflation but causes unemployment.
The monetary policy tug-of-war is particularly hard-won this year, given that we're experiencing sticky inflation and more layoffs. That's made picking the proper mandate to target particularly tough.
The Fed juggles inflation and unemployment threats
Unemployment has picked up following the Fed's most hawkish policy in decades. After admitting inflation wasn't transitory, Fed Chair Powell embarked on the most restrictive pace of interest rate hikes since Fed Chair Volcker battled inflation in the early 1980s.
As a result, inflation has retreated, but higher interest rates have capped economic activity, contributing to the unemployment rate rising to 4.2% from a low of 3.4% in 2023.
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The uptick in unemployment prompted the Fed to cut interest rates in September, November, and December. However, inflation risks have escalated this year, even as the job market wobbles.
In February, President Trump announced 25% tariffs on Canada, Mexico, and autos. He followed up those tariffs by announcing additional reciprocal tariffs on most imports on April 2. He paused many reciprocal tariffs on April 9, pending trade negotiations. Still, he left in place a 10% baseline tariff and escalated a trade war with China that lifted Chinese tariffs to 145%, effectively shuttering trade between the two economic giants.
Since tariffs are paid by the company importing the goods, they can increase inflation. Companies must either pass higher costs on to consumers or take the hit to their bottom lines.
The risk that tariffs reignite inflation is particularly troublesome for the Fed, given there's been little progress on inflation since last Fall. The Consumer Price Index showed inflation was 2.4% in March, matching the level from last September.
Analyst makes bold interest rate cut prediction
Most Fed watchers expected the Fed to continue cutting interest rates in 2025, given that they reduced rates by 1% in the final months of 2024.
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Those hopes, however, have continuously been dashed by ongoing data and policy announcements, resulting in a major re-ratcheting of interest rate cut forecasts.