Why Trump and Investors Might Be Disappointed by the Fed’s Caution

The Federal Reserve’s decision to hold interest rates steady at 4.25%-4.5% in its May 2025 meeting has sparked frustration among two key constituencies: President Donald Trump and investors hoping for immediate relief from persistent economic headwinds. While the Fed’s cautious stance reflects its data-dependent approach, the lack of an immediate rate cut and its emphasis on lingering risks like inflation and trade uncertainty may leave both Trump and markets feeling short-changed.

The Fed’s Message: Patience, Not Panic

The central bank’s statement highlighted its reluctance to act preemptively, citing “elevated uncertainty” around trade policies and inflation. Core PCE inflation, the Fed’s preferred gauge, remains stubbornly above its 2% target at 2.6%, while the first-quarter GDP contraction—a 0.3% annualized drop—raised red flags about the economy’s momentum.

The Fed’s forward guidance left the door open for a June rate cut, but markets are already pricing in a mid-3% federal funds rate by year-end—a trajectory that hinges on clearer signals of cooling inflation. However, Chair Jerome Powell’s emphasis on “data dependency” suggests no guarantees.

Trump’s Tariffs vs. Economic Reality

President Trump has been a vocal critic of the Fed’s reluctance to cut rates faster, calling Powell “a major loser” and blaming high interest rates for stifling growth. His defense of aggressive tariffs—like a 145% levy on Chinese imports—has drawn sharp criticism from economists and industry groups.

Yet the administration’s policies are backfiring. A contraction underscores the drag of trade tensions, while grocery prices rose 2.41% year-over-year in April, hitting households disproportionately. Despite this, Trump insists tariffs will “make us rich,” dismissing warnings about a recession that 69% of Americans now fear, according to a May CNN/SSRS poll.

Investors: Caught Between Hope and Data

Investors, too, are split. While the S&P 500 surged 9.5% in April—the best single-day gain since 2009—broader market sentiment remains fragile. Fixed-income markets are pricing in a slower rate-cut path than earlier expected, reflecting skepticism about the Fed’s ability to navigate competing risks:

• Inflation: show core PCE hovering near 2.6%, with food prices up 3% due to supply chain disruptions.
• Growth: The Fed’s March projections already downgraded 2025 GDP growth to 1.7%, and the Q1 contraction may force further revisions.
• Political Uncertainty: Trump’s budget blueprint—a $1 trillion defense spending boost paired with deep cuts to healthcare, education, and climate programs—adds to volatility.

The Disappointment Divide

Trump’s frustration stems from a mismatch between his rhetoric and economic reality. His tariffs, intended to “revive manufacturing,” have instead fueled inflation and consumer anxiety. Meanwhile, investors are left weighing the Fed’s caution against the need for faster easing. A would likely show a correlation between rate expectations and market volatility.

Conclusion: A Delicate Balancing Act

The Fed’s decision to stay patient is a calculated risk. While it avoids the political trap of appeasing Trump’s demands, it also avoids exacerbating inflation risks. However, markets may punish the central bank if Q2 data fails to show improvement.

With 69% of Americans fearing a recession and the Fed’s balance sheet reduction still underway—Treasury holdings are trimmed by $5 billion/month—the path forward is fraught. Investors and policymakers alike must brace for a prolonged period of uncertainty, where the Fed’s caution may feel less like wisdom and more like inaction.

As the June meeting approaches, the question remains: Can the Fed thread the needle between cooling inflation and avoiding a recession—or will it become the target of bipartisan disappointment? The data, not the rhetoric, will decide.