Fed Holds Steady in May, Eyes Tariff Risks as Markets Shift Rate Cut Expectations

Updated on 13 May 2025

With three of eight scheduled meetings behind them, the Federal Reserve is maintaining its cautious approach for 2025. At its May policy meeting, the Federal Open Market Committee (FOMC) held interest rates steady in the 4.25% to 4.5% range, reinforcing a growing “wait-and-see” posture in the face of intensifying economic crosscurrents—chiefly, tariff-related uncertainty.

No Cut Yet, But Markets Still Expect Lower Rates Ahead

Though the Fed’s stance has not shifted since March, financial markets continue to price in rate cuts later this year. Based on futures data, there is roughly a 50/50 chance of a rate cut in July—and at least one cut is seen as likely by September. By year-end, short-term interest rates are expected to fall into the 3.5% to 4% range, with two or three rate reductions considered the most probable outcome.

The Inflation–Unemployment Balancing Act

While inflation remains just slightly above the Fed’s 2% target, policymakers now acknowledge growing dual risks: rising inflation on one hand, and potential unemployment pressures on the other. Fed Governor Michael Barr has cited trade policy uncertainty as a key factor weakening sentiment among consumers and businesses alike. He also warned that tariffs could fuel both higher inflation and slower growth moving forward.

Fed Chair Jerome Powell echoed this concern during the May post-meeting press conference, stating that the Fed’s current policy rate is “in a good place” as officials await further clarity. He highlighted the mismatch between solid labor market data and softening consumer sentiment, suggesting the Fed won’t act until that divergence becomes clearer in hard data.

June, September, and December in Focus

Upcoming FOMC meetings on June 18, July 30, September 17, October 29, and December 10 are expected to bring greater insight. Specifically, the June, September, and December meetings will include updates to the Fed’s Summary of Economic Projections—a key release that outlines forecasts for inflation, growth, and future interest rates.

While no immediate change is expected in June, markets and policymakers alike will be watching closely for updated guidance—particularly regarding the economic effects of ongoing tariffs.

Investor Implications: Stay Flexible, Stay Informed

Strategists at J.P. Morgan and elsewhere still anticipate that interest rate cuts will come in the second half of the year. However, they caution that policy remains highly data-dependent. To navigate this environment, investors should:

• Reassess risk exposure: Volatility may persist as markets digest evolving trade and economic signals.

• Watch upcoming data releases: Reports like the April CPI (scheduled for May 13) will be crucial to shaping the Fed’s tone.

• Diversify smartly: In a fragmented macro landscape, asset class and geographic diversification remains a proven buffer.