Fed Rate Cut Outlook Shifts to July Amid Resilient Jobs Market, But Tariff Risks Loom
2min read The Federal Reserve’s path to easing monetary policy has grown more uncertain after the April jobs report outperformed expectations, pushing Barclays and Goldman Sachs to delay their projected first rate cut of 2025 to July. While the strong labor market data has bolstered policymakers’ confidence, escalating trade tensions and softening economic indicators have analysts warning of a fragile outlook requiring “insurance” cuts later this year.
The Jobs Report’s Impact on Fed Timing
The April jobs report added 177,000 nonfarm payrolls, far exceeding the 160,000 estimate, with unemployment holding steady at 4.2%—the lowest rate in over two decades. This resilience, driven by a labor force net inflow at its highest since August 2023, has convinced Barclays and Goldman Sachs to revise their forecasts. Both firms had previously anticipated a June rate cut but now see the Fed waiting until July to ease.
The Fed’s current policy stance reflects this cautious optimism. Policymakers have maintained the target range of 4.25%-4.5%, citing persistent inflationary pressures. Core PCE inflation, a key Fed metric, remains elevated at 3.8%, aligning with the April report’s 3.8% annual growth in hourly earnings.
Goldman Sachs: Three Rate Cuts by Year-End, With Recession Risks
Goldman Sachs now expects three quarter-point rate cuts by December 2025, starting in July. This upward revision—from two cuts to three—reflects heightened concerns about President Trump’s tariffs, which have yet to fully impact the economy. Analyst Lindsay Rosner noted the “backward-looking” nature of the April jobs report, contrasting it with weakening forward-looking indicators like declining consumer confidence and slowing GDP growth.
Goldman also raised its 12-month recession probability to 35% (from 20%), projecting U.S. unemployment to rise to 4.5% by year-end and GDP growth to slow to 1% on a Q4/Q4 basis. The firm’s downgrade underscores the fragility of an economy facing tariff-driven headwinds.
Tariff Risks: The “Full Weight” of Trade Policy
President Trump’s tariffs—including 25% levies on imported cars and steel/aluminum—are central to the outlook. While the labor market has absorbed these pressures so far, BMO’s Scott Anderson warns that the “full weight of the tariffs shock” could weaken the economy later in 2025.
The Fed’s independence is under scrutiny as policymakers resist political calls for faster easing. Chair Powell reiterated the central bank’s focus on data over rhetoric, emphasizing that tariffs’ economic impact remains uncertain.
Market Adjustments and Policy Dynamics
Traders have already pivoted to align with the July timeline, with federal funds futures pricing in a 68% probability of a July cut (up from 45% before the jobs report). However, Goldman’s Rosner cautions that “soft data” on business investment and housing—both sensitive to rate changes—could force the Fed to adopt a more aggressive easing stance by late 2025.
Conclusion: Caution Amid Resilience
While the July rate cut appears increasingly likely, the path ahead remains fraught with risks. The 35% recession probability and projected 1% GDP growth signal that the Fed’s patience could be tested if tariffs tip the economy into a slowdown. Investors should prepare for volatility:
- Equities: Sectors sensitive to rate cuts (e.g., tech, real estate) may rally on Fed easing, but tariff-exposed industries (autos, manufacturing) face headwinds.
- Bonds: The 10-year Treasury yield could drop further if recession risks materialize, but near-term resilience may limit declines.
- Recession Buffer: The 4.5% unemployment target—still below pre-pandemic levels—suggests the Fed has room to cut rates without triggering immediate labor market stress.
In short, the Fed’s July rate cut buys time, but the true test lies in whether the economy can withstand the “full weight” of trade policy. With data driving decisions, investors must remain nimble—ready to pivot as inflation, tariffs, and soft data shape the Fed’s next moves.
