Here’s Why The Fed Likely Won’t Cut Rates Like Trump Wants This Month

The U.S. economy has been full of surprises since the Federal Reserve started rapidly raising interest rates to quell inflation back in 2022. The latest shocker might just be that the Trump administration’s tariffs haven’t pushed up inflation more.

Since April, taxes on foreign-made and imported goods have been the highest in nearly a century, after President Donald Trump announced a universal baseline levy on every country that trades with the U.S., introduced massive industry-based tariffs and briefly escalated tensions with China. Even so, price increases — including on the items at the front lines of the trade war — have been relatively tame. Inflation has risen less than economists’ forecasts for the past two months.

The conundrum matters for Fed officials, who’ve pressed the pause button on their rate cuts out of fear that they might make any tariff-induced price shock worse.

Those price increases could still be coming. Earlier this year, companies rushed to build up inventories in anticipation of Trump’s tariffs, but that extra supply will eventually run out. The Fed could temper inflation by keeping rates high, but that strategy comes with risks of its own, at a time when the latest economic data suggests that cracks could be forming in the once-formidable U.S. job market.

The Fed’s rate-setting Federal Open Market Committee (FOMC) is unlikely to feel confident enough that they can get back to cutting borrowing costs when they announce their next interest rate decision on June 18, economists interviewed by Bankrate say. That means the price that you pay to finance big-ticket purchases — from a car to a home remodel — will remain at a near-decade high. The returns you earn on your savings, meanwhile, will stay competitive, especially if you’re keeping your cash in a nontraditional, online bank that rewards its depositors with high yields.

Beyond not knowing how tariffs could impact the economy, another landmine that officials may have to navigate is political pressure. Trump in recent weeks has renewed his attacks on the U.S. central bank, saying Fed Chair Jerome Powell is always “too late” to adjust borrowing costs and that he “might need to force something.” After job growth in May topped expectations, Trump demanded that the Fed cut their key borrowing benchmark a full point. Vice President J.D. Vance even started to join the chorus of calls for rate cuts after May’s surprisingly tame consumer price index (CPI) report, describing keeping rates high as “monetary malpractice.”

Trump told reporters in early June that he’ll announce his pick for Fed Chair Jerome Powell’s replacement “very soon.”

Here are the biggest themes to watch at the Fed’s next meeting, including why the Fed isn’t cutting borrowing costs yet — and whether there could be some legitimacy to Trump’s calls for lower rates.

Why isn’t the Fed cutting interest rates? Officials are still cautious that tariffs could eventually push up inflation

For now, the big debate at the Fed will be whether tariff-induced price increases have ended or if they are just delayed. Two soft inflation reports might not be enough evidence yet for policymakers who’ve been hearing from business contacts for months that they’re likely going to hike prices.

“We’ve had — the last two months — excellent inflation reports, but when we’re out talking to people, they’re like, ‘Oh just wait,’” said Chicago Fed President Austan Goolsbee at a public appearance in early June. “I would say surprisingly little direct impact so far in the data that’s coming out, but with the question mark, we don’t know if that will remain true in the next month or two.”

Some companies have already started to pass along those higher prices, according to separate business surveys from the New York Fed and Cleveland Fed. Others say price hikes could return in the coming months, the survey showed. Even if companies pass along just half of those higher tariff costs, retail prices could rise almost a full percent, models from the Atlanta Fed show.

National brands including Walmart, Home Depot and Best Buy have warned that they might eventually have no choice but to raise prices, the longer tariffs eat into their profit margins. Target CEO Brian Cornell called price hikes a “very last resort.” 

“The difficulty level has been incredibly high given the rates we’re facing and the uncertainty about how these rates in different categories might evolve,” Cornell said during an earnings call with analysts in late May. 

Inflation has long operated with a lag. After the Trump administration lifted levies on washing machines to as high as 50 percent in January 2018, those products didn’t surge in price until the following April, according to a Bankrate analysis of BLS data. Those figures wouldn’t have been released until May of that year. 

Major appliances rose 4.3 percent last month, the sharpest gain since August 2020. But there was little evidence of tariff-induced price hikes in other commonly imported goods. Goods prices were flat when excluding the volatile food and energy categories. Apparel prices as well as used and new vehicle prices also fell. 

“It’s hard for the Fed to think about how much inflation is going to go up,” says Derek Tang, economist and CEO at LHMeyer, a monetary policy research team founded by former Fed Governor Larry Meyer. “But because there’s this risk it will go up, the Fed needs to make sure it doesn’t cut too soon. Their bias is to wait a little bit longer.”

What if tariffs don’t push up inflation? Some Fed officials say it could be possible

But there could be another, more harrowing culprit for the relatively tame inflation data: Consumers might be starting to pull back.

“What I’m hearing from retailers is that consumers are about tapped out,” said Richmond Fed President Tom Barkin in a public appearance from early May. “It’s nice to say you’re going to pass it on, but it’s not as easy to pass it on as you might think.”

Companies having little room to hike prices is one reason former St. Louis Fed President Jim Bullard said in a recent interview with Bankrate that officials should be more concerned about tariffs causing a recession, not inflation.

“You can’t just go into a market and say, ‘All of a sudden, I’m just going to charge more for my product’ and not expect your demand to fall off,” he told Bankrate in an exclusive interview last month. “With high tariffs, you’re not going to have any demand at all for your product.”

Some corners of inflation are already indicating that a slowdown in consumer spending may be afoot. Prices on many discretionary services — which tend to rise and fall depending on consumer demand — fell in May, including on airfares, ticketed events and hotels and motels, BLS data showed.

That comes at a time when nearly 2 in 5 Americans say they’re planning to cut back on either travel or experiences this year, according to a recent Bankrate survey.

“We never thought tariffs would lead to inflation in a sustained sense,” said Luke Tilley, chief economist at Wilmington Trust and a former economic advisor to the Philadelphia Fed. “I don’t think consumers can handle 10-15 percent price increases on imported goods and keep spending in other places because they’re much more strapped now.”

Fed Governor Christopher Waller, widely seen as a front-runner for Powell’s replacement, has said he doesn’t think tariffs will create another inflation problem like the pandemic. Consumer spending is already weakening, rising at the slowest pace since 2023 in the first three months of the year, according to the latest data from the Department of Commerce. The labor market is also considerably cooler today than it was in 2022, when prices surged.

“Workers don’t have much leverage to ask for raises and are probably more worried about keeping their jobs right now,” he said during a speech in early June.

Are Trump’s calls for a rate cut warranted? The U.S. economy is starting to flash some warning signs, experts say

As officials debate whether they should be concerned about inflation, cracks are appearing in the foundation of the U.S. economy.

The U.S. economy is still adding jobs, but they’re not broad-based, concentrated in only a few sectors: health care and leisure and hospitality. The nation’s unemployment rate is also near historic lows, but that’s because people are dropping out of the labor force, according to Kathy Bostjancic, chief economist at Nationwide.

Had the labor force remained steady in May, last month’s 4.2 percent unemployment rate would’ve risen to 4.6 percent, her calculations show.

“The labor participation rate might have fallen due to potential workers becoming too discouraged to look for a job due to softening in job prospects or it stemmed from reductions in immigration are reducing labor supply,” she said. “Data can be volatile month to month, so we will need further data to determine whether this emerges as a sustained trend.”

Americans are also staying unemployed for longer. The number of new applications for unemployment benefits has been at the highest level since October for two straight weeks, and the share of Americans who are continuing to file for weekly unemployment benefits is the highest since 2018, according to the latest data from the Department of Labor.

Fewer workers than before the pandemic are voluntarily quitting their jobs, often a reflection of their attitudes about the strength of the job market. Meanwhile, the rate at which workers are getting hired is the lowest since 2014.

“You have an economy that’s still chugging along, but the buffer is not that big, and we could be in a downturn pretty soon,” Tang said, referring to how much more room the economy has to cool before risking a more painful slowdown. “Normally, the Fed would say, ‘There could be a downturn. We don’t have that much space. Maybe we cut first to stop that from happening.’”

When could the Fed cut borrowing costs? Maybe not until July or September, these experts say

But even the dovish Waller doesn’t seem to think the Fed will cut interest rates until “later this year,” the official said in his last remarks before the Fed’s June meeting.

If you’re looking for clues on when those cuts might occur, you might be able to find some soon. Released along with the Fed’s June rate decision will be updated projections on where officials see the labor market, inflation and interest rates heading over the year ahead. Key for consumers will be whether policymakers continue to project two rate cuts this year, as they did when they last updated those projections in May.

Markets still expect that the Fed will cut borrowing costs twice in 2025, beginning in September and one more time in December, according to CME Group’s FedWatch tool. Tang, however, isn’t expecting any rate cuts until 2026.

But Tilley is projecting that the Fed will cut borrowing costs a full point this year, beginning in July, because the U.S. economy is on weaker ground than headline numbers may suggest.

“There is very little reason for them to keep rates as high as they are now,” he said. “They are taking comfort in decent economic data and are concerned about tariffs. We expect the data to deteriorate enough for cuts to begin.”

3 steps to take while borrowing costs stay high

If the Fed cuts rates because the U.S. economy takes a turn, that wouldn’t be good news for consumers, according to McBride.

“We romanticize this idea of the Fed cutting rates, but the reason they cut rates is really important,” McBride said. “We want the Fed to cut rates because inflation pressures have eased and the economy is continuing to chug along. We don’t want the Fed to be cutting rates because the economy is rolling over. And if the Fed is going to aggressively cut interest rates, it’s going to be because the economy rolled over.”

Economists put the odds of a recession by March 2026 at 36 percent, according to Bankrate’s latest Economic Indicator Survey. Those odds may rise or fall depending on tariffs, experts said.

If you’re trying to figure out what to do with your money in today’s uncertain economic environment, McBride advises you concentrate on two goals: recession-proofing your wallet and protecting yourself from high-interest debt.

• Pay down debt
  

  After years of enduring historic inflation, Americans might not have much extra room in their budgets to ramp up their savings. One avenue, however, might be eliminating your credit card balances. The average credit card is charging consumers a 20 percent annual percentage rate (APR), even a full percentage point of cuts from the Fed. Despite rising recession odds, the best balance-transfer cards on the market offer up to 21 months of a 0 percent intro APR.

• Go through your budget
  

  Americans typically have a greater chance of losing their jobs in a recession. Even those who remain employed, though, can see weaker wage growth and a drop in the value of their 401(k) or other investments. Regularly review your monthly expenses and make a note of any items you might cut back on or eliminate, if cash were to become tight.

• Find the right place for your cash
  

  You might be able to grow your emergency fund just by putting your cash in a place where it’s rewarded. Swapping a next-to-nothing yield at a traditional, brick-and-mortar bank for an annual percentage yield (APY) worth 4 percent or more at a high-yield savings account can translate into significantly greater returns that only compound over time.