Fed’s Policy Outlook for 2025: Rate Cuts on Hold Amid Tariff Uncertainty

The Federal Reserve’s monetary policy trajectory for the remainder of 2025 remains constrained by economic uncertainties, particularly the unresolved impact of President Donald Trump’s tariffs. With one scheduled meeting left in 2025—on December 10—the central bank faces a critical decision on whether to maintain its current rate range of 3.75% to 4% or implement a cut. Market expectations, as measured by the CME’s FedWatch Tool, suggest a gradual path toward 3% by 2026, but the timing remains ambiguous .

The Fed’s hesitance stems from its cautious stance on tariffs, which have complicated inflation dynamics. Federal Reserve Chairman Jerome Powell has emphasized the need for clearer economic signals before adjusting rates, despite pressure from the administration and internal divisions among policymakers . The central bank’s October meeting minutes, set for release on November 19, may provide further insight into its strategy .

Key economic indicators highlight the Fed’s dilemma. Labor market data reveals a “weak and near stall speed” environment, according to Fed Governor Christopher Waller, who has advocated for rate cuts. However, inflation data through September showed minimal structural effects from tariffs, with underlying inflation nearing the FOMC’s 2% target when accounting for tariff impacts .

Waller’s analysis underscores that while realized inflation has exceeded 3% for five years, medium- and long-term inflation expectations remain stable .

The debate over tariffs’ inflationary effects is central to the Fed’s deliberations. While tariffs have caused a one-off price increase, they are not a persistent inflation driver. This distinction influences the central bank’s assessment of whether rate cuts are premature . Fed officials must balance the risk of tightening policy too aggressively against the potential for prolonged high rates to exacerbate labor market weakness.

Fixed income markets reflect a nuanced outlook. The CME’s FedWatch Tool indicates that markets anticipate a gradual reduction in rates toward 3% by 2026. However, the lack of consensus among policymakers—evidenced by Waller’s advocacy for cuts versus others’ caution—highlights the uncertainty surrounding the path forward . The December meeting will likely hinge on whether incoming data confirms the stability of inflation expectations and the extent of tariff-driven price pressures.

The broader implications of the Fed’s inaction extend beyond domestic markets. Tariff-related disruptions in global supply chains could delay the normalization of monetary policy, affecting international capital flows and trade dynamics. For now, the Fed’s strategy of waiting for clearer signals aligns with its mandate to prioritize price stability and maximum employment .