May 13, 2025—Inflation has been cooling over the first quarter of the year, though it still remains above the Federal Reserve’s long-range 2.00% target. The Consumer Price Index was 2.3% year over year for April, down from 2.4% in March, the lowest in four years. The outlook for inflation and how the Fed reacts will most likely depend on trade tensions. Concerns over supply chain disruptions could easily result in inflationary pass-throughs from import costs even as the United States and China recently announced a 90-day reprieve on previously announced tariffs.
While government trade policy could weigh on inflation, it may also have a negative effect on economic growth if a slowdown in business investment emerges. This is something the Federal Open Market Committee (FOMC) members seem to be watching closely. As Fed Governor Lisa Cook remarked in a speech last week at Stanford University, “I expect to see a drag on productivity in the near term. At this time, firms do not know the ultimate level and incidence of tariffs or their duration,” Cook said. “Higher costs of imported materials and components could also cause firms to delay or scale back their investment plans.”
Slowing business investment would make the Fed’s other mandate pillar of full employment more difficult to maintain. Fed Chair Jerome Powell in his post-decision speech following the recent FOMC meeting on May 7th mentioned that with the unemployment rate at 4.2% that the economy is close to this goal. But most economists believe that trade uncertainty will result in hiring freezes and less new job openings, increasing the jobless rate.
While the Fed keeps its eye on Washington more than usual, Powell is once again being pressured by the White House to lower interest rates to give a boost to equity markets. Economists and investors had long expected to see two or three rate cuts this year, but with all this uncertainty looming, a cut at the June meeting is seemingly to be off the table. Rate cuts in September and December are still expected, but the FOMC could be inclined to leave rates as they are until the threat of tariff negotiation subsides.