Market Minute: April was the cruelest month. Now, all eyes are on the Fed.

REAL ECONOMY BLOG | May 02, 2025

Authored by RSM US LLP

We expect the Federal Reserve to keep its policy rate in a range between 4.25% and 4.5% with little to no change in the policy statement when the Federal Open Market Committee meets on May 6 and 7.

But while we expect little change in policy, the press conference afterward is sure to be a lively one as Fed Chairman Jerome Powell answers questions on rates and inflation, the impact of tariffs, the Fed’s independence, and the direction of monetary policy as the economy slows.

Recent comments by Fed officials have reflected diverse opinions on the economic outlook.

But what is clear is that uncertainty hangs like the sword of Damocles over the economy, presenting a vexing challenge for policymakers who otherwise might be thinking about risk management and rate cuts.

Within a matter of 90 days, the Fed will most likely be facing rising inflation and unemployment as tariffs kick in.

The Fed playbook under those conditions is for the central bank to lean toward which part of its dual mandate—pricing stability and maximum sustainable employment—is further away from its target.

With a 4.2% jobless rate reflecting an economy at full employment and inflation standing well above the Fed’s 2% target, the central bank will not be cutting rates next week, nor this summer.

Our forecast implies that it will not be until the fall before Fed officials have a good sense of whether they will be able to look through tariff-inspired inflation and cut rates or if they are forced to consider hiking rates to prevent another round of inflation.

In my estimation, cutting rates at this time would be premature and risk a nastier bout of stagflation than the economy is currently facing.

The last thing the Fed wants is to subject the economy to another pricing shock initiated by the White House.

Price stability is a precondition for maximum sustainable employment, a point that Powell will stress during his press conference.

My sense is that if presented with that choice, Fed officials will choose higher rates until they are convinced inflation is moving back toward the 2% target.

This article was written by Joseph Brusuelas and originally appeared on 2025-05-02. Reprinted with permission from RSM US LLP.
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