President Trump said he wouldn’t fire Federal Reserve Chairman Powell, but the pressure for rate cuts continues. The market, however, is still betting that the central bank will stand firm and leave its target rate steady at Wednesday’s policy announcement.
In a TV interview that aired on Sunday the President said he expected the Fed to cut rates. “Well, he should lower them. And at some point, he will,” Trump reasoned. “He’d rather not because he’s not a fan of mine. You know, he just doesn’t like me because I think he’s a total stiff,” he advised in comments that were taped on Friday.
Fed funds futures this morning are pricing in a near-certainty probability that the 4.25%-to-4.50% range will remain intact at the policy meeting scheduled for Wednesday (May 7).
Friday’s better-than-than expected rise in US payrolls in April provide support for the no-change-in-rates outlook. Although economists have downgraded the economic outlook due to Trump’s tariffs, the labor market still looks relatively resilient. The question is whether robust hiring will downshift in the months ahead once tariff-related blowback works its way into the economy?
“We can push recession concerns to another month. Job numbers remain very strong, suggesting there was an impressive degree of resilience in the economy in play before the tariff shock,” said Seema Shah, chief global strategist at Principal Asset Management. “The economy will weaken in the coming months but, with this underlying momentum, the U.S. has a decent chance of averting recession if it can step back from the tariff brink in time.”
As for the Fed, it appears unlikely to cut rates pre-emptively without distinct signs of economic trouble, such as a sharp slide in hiring.
“It’s too uncertain to be pre-emptive” [with rate cuts], said Ellen Meade, who was a senior adviser to the Fed’s board of governors until 2021 and is now at Duke University. “The date for a cut is the time that the slowing of the economy outweighs, in their view, the overshoot in inflation.”
Deciding whether the bigger risk from tariffs is higher inflation or lower employment will take time to show up in the data. Meanwhile, Bloomberg Economics said:
“We expect Powell to push back against market pricing and signal a renewed priority on price stability. Officials like Richmond Fed President Thomas Barkin and Fed Governor Adriana Kugler have voiced concerns that inflation expectations may be loosening. Add to that the solid April payroll print and there’s little pressure for a near-term cut.”
The policy-sensitive US 2-year Treasury yield , however, appears to be pricing in higher odds for rate cuts sooner rather than later.
The 2-year yield has been trending down since reaching a 2025 peak in January at 4.40%. On Friday, the rate closed at 3.83%, which is substantially below the 4.33% median Fed funds rate. The wider downside gap is the market’s implied forecast that rate cuts are near.
Although opinions vary widely on Wall Street about policy changes, all eyes will turn to Fed Chairman Powell at Wednesday’s press conference for fresh clues.
Fed Governor Chris Waller recently suggested that policy changes aren’t imminent, in part because of the 90-day pause on reciprocal tariffs. “I don’t think you’re going to see enough happen in the real data in the next couple of months, until you get past July,” he recently advised.
