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Why the Fed Isn’t Ready to Join Other Central Banks in Cutting Rates

Philip CarterThursday, May 8, 2025 9:36 am ET

3min read

The global monetary policy landscape in 2025 is marked by a stark divide: while the European Central Bank (ECB) and Bank of England (BoE) pivot toward easing cycles, the Federal Reserve (Fed) remains stubbornly on hold. With inflation pressures easing in many regions, why has the Fed resisted joining its peers in cutting rates? The answer lies in a cocktail of political uncertainty, mixed economic signals, and a uniquely American inflation dynamic—one that other central banks do not face.

The Fed’s Divergent Path: A Caution Rooted in Trade Wars

The Fed’s decision to maintain its benchmark rate at 4.25%-4.5% since late 2024 reflects an unusual blend of patience and anxiety. Unlike the ECB or BoE, the Fed is grappling with the direct economic fallout of U.S. trade policies, particularly tariffs imposed by President Trump. These tariffs risk reigniting inflation through higher import costs while simultaneously damping growth via reduced trade volumes.

The Fed’s May 2025 statement emphasized that “uncertainty about the economic outlook has increased further”, citing risks to both inflation and employment. While core inflation (excluding volatile food and energy) edged down to 2.6%, it remains above the 2% target. Crucially, the Fed is wary of second-order effects: tariffs could disrupt supply chains, delay productivity gains, or even trigger a stagflationary spiral—a blend of high prices and stagnant growth reminiscent of the 1970s.

Why the ECB and BoE Can Cut with Confidence

In contrast to the Fed, the ECB and BoE enjoy clearer skies. The ECB, for instance, has slashed rates five times since mid-2024, with a 25 basis point cut in April 2025 bringing its deposit rate to 2.25%. This boldness stems from disinflationary tailwinds: eurozone inflation has cooled to 2.1%, aided by lower energy prices and a stronger currency. Governor Christine Lagarde’s “data dependency” mantra allows the ECB to react swiftly to benign trends.

The BoE’s May cut to 4.25% similarly reflects confidence in its inflation trajectory. While UK inflation remains above target at 2.6%, the BoE anticipates a temporary spike to 3.5% in late 2025 before a return to 2%. A resilient labor market—unemployment at 4.2%—and weaker GDP growth (0.1% in Q2) provide room to ease without risking runaway prices.

The Fed’s Unique Constraints: Politics and Data

The Fed’s hesitancy isn’t just about economics—it’s also about politics. President Trump’s vocal calls for rate cuts clash with the Fed’s independence. Yet, the Fed has chosen to prioritize data over political pressure, despite markets pricing in a potential July cut. Key sticking points include:

Trade Policy Volatility: Tariffs remain a wildcard. If they’re rolled back, inflation could ease faster—but if they’re expanded, prices could surge.
Mixed Signals in the U.S. Economy:
GDP dipped 0.3% in Q1 2025, but this may reverse in Q2.
Jobs data remains robust: Nonfarm payrolls added 177,000 in April, with unemployment near historic lows.
Housing market disinflation: Shelter costs, a major inflation driver, are finally cooling, but this could take time to feed into overall prices.

The Investment Implications: Proceed with Caution

For investors, the Fed’s divergence creates opportunities and risks:
- U.S. Bonds: The flat yield curve suggests limited gains in Treasuries until the Fed signals a cut.
- Equities: Markets have priced in Fed easing, so any delay could trigger volatility. The S&P 500’s recent gains (up 8% YTD 2025) may stall if the Fed holds firm.
- Currencies: The dollar’s strength could persist if the Fed stays hawkish longer than peers, pressuring GBP/USD and EUR/USD.

Conclusion: Patience is a Policy

The Fed’s reluctance to cut rates is no accident—it’s a calculated stance to avoid the pitfalls of premature easing in an uncertain environment. While the ECB and BoE can act with confidence, the Fed’s hands are tied by trade policy risks and inflation’s stubborn persistence.

The data underscores this divide:
- ECB rate cuts (5 since mid-2024) vs. the Fed’s 0 cuts in 2025.
- U.S. 10-year Treasury yields remain elevated at 3.7%, reflecting market skepticism about near-term Fed easing.
- Trade policy uncertainty has shaved 0.5-1% off U.S. GDP growth projections for 2025.

Investors should prepare for prolonged divergence. Until tariffs are resolved or inflation convincingly dips below 2%, the Fed will remain the outlier—a central bank holding its ground while others march toward easing.

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