Fed’s Pressure to Cut Rates Comes From Trump, Not the Economy

The Federal Reserve’s decision to hold interest rates steady at 4.25% to 4.5% in May 坦言, 2025, despite intense political pressure from President Donald Trump, underscores a stark divide between the White House’s demands and the economic fundamentals guiding the central bank’s policy. While Trump has repeatedly urged rate cuts to counteract the risks of his own trade policies, the Fed’s stance remains anchored in inflation data, labor market resilience, and the risks of premature easing.

The Case for Caution: Fed’s Data-Driven Stance

The Fed’s decision reflects its reliance on hard economic data, which paints a mixed but fundamentally stable picture:
- Inflation: Core PCE inflation stands at 2.6%, near the Fed’s 2% target, though tariffs on Chinese imports (now as high as 145%) risk reigniting price pressures.
- Labor Market: Unemployment remains near record lows at 4.2%, with April payrolls adding 177,000 jobs—a strong signal of resilience despite tariff-driven uncertainty.
- GDP: While the first quarter saw a 0.3% contraction due to pre-tariff import surges, most economists project a rebound in Q2.

The Fed’s May statement emphasized that “uncertainty about the economic outlook has increased further”, citing tariff risks but also noting that “the risks of higher unemployment and higher inflation have risen.” This dual threat—stagflation—has made policymakers wary of cutting rates prematurely.

Trump’s Political Play: Tariffs and the Fed’s Independence

President Trump has amplified calls for rate cuts, framing them as essential to offset his own trade policies. In a recent tweet, he claimed “there is virtually No Inflation” and urged the Fed to act, despite data showing core inflation above target. His administration’s tariffs, intended to boost domestic industries, have instead introduced volatility:
- Market Reactions: The S&P 500 fell 1.2% in early April after Trump’s “Liberation Day” tariff announcement, though it has since stabilized.
- Political Pressure: Trump’s threats to replace Fed Chair Jerome Powell—though later retracted—spooked bond markets, briefly pushing the 10-year Treasury yield to 4.3%.

Why the Fed Isn’t Blinking

The Fed’s resistance to political pressure is rooted in three key factors:
1. Inflation Risks: Tariffs could amplify price spikes in sectors like manufacturing and consumer goods. Fed officials, including Cleveland’s Beth Hammack, warn that premature cuts might worsen inflation’s persistence.
2. Labor Market Strength: With unemployment near 4%, the Fed sees no immediate need to stimulate job growth.
3. Global Uncertainty: Trade wars with China and the EU remain unresolved, making a “wait-and-see” approach prudent.

Market Expectations vs. Reality

Markets are pricing in a different narrative. Futures markets now imply a 56% chance of a rate cut by July, with three cuts expected by year-end. This contrast between the Fed’s caution and investor optimism creates a risk of misalignment:
- Equity Markets: Retail investors have driven a record 21-week buying streak in equities, but institutional funds remain net sellers, reflecting divergent views.
- Borrowing Costs: Mortgage rates, tied to bond yields, have risen to 6.8%, despite the Fed’s pause, highlighting market skepticism about inflation control.

Conclusion: Fed’s Independence Holds—For Now

The Fed’s decision to maintain rates at 4.25%-4.5% in May 2025 reflects its prioritization of economic data over political theater. While markets anticipate cuts, the central bank’s calculus hinges on avoiding the twin perils of inflation and unemployment rising simultaneously—a scenario Trump’s tariffs have made all too plausible.

Crucial data points support this stance:
- Inflation: Core PCE at 2.6% remains above target, with tariffs risking upward pressure.
- Labor Market: Unemployment near 4.2% provides little urgency for stimulative cuts.
- GDP: A Q1 contraction is seen as temporary, with Q2 growth expected to rebound.

Investors betting on rate cuts must weigh the Fed’s resolve against the risks of stagflation. A premature cut could erode inflation-fighting credibility, while delayed action might fuel market volatility. The Fed’s next move hinges less on Trump’s rhetoric than on whether tariffs finally tip the economy into a slowdown—or ignite prices—by mid-2025.