Fed expected to hold interest rates and vex Trump
The US Federal Reserve will not bring interest rates down until July, Goldman Sachs has predicted, in what may spark a fresh conflict between President Trump and Fed chair Jerome Powell.
The world’s most powerful central bank has held back from making interest rate cuts due to a foggy outlook on what a trade war could mean for US prices and growth.
Its current range of 4.25 per cent to 4.5 per cent is likely to remain unchanged after a decision to be made today at 7pm BST, according to leading forecasters, given the havoc created by US tariffs.
Goldman Sachs said it only expected the Fed to delay three consecutive 25 basis point cuts to later this summer due to mixed signals and a dire economic outlook.
A lowered inflation rate in March prompted Trump to call for interest rate cuts again but the Fed said in March it expected price growth to remain high at 2.7 per cent this year.
It could yet revise up its figure at today’s decision.
Data released last week has also pointed to a relatively positive labour market, though most forecasters point to a more troubling future for the US economy.
A report by the banking giant said: “Fed officials have recently highlighted the risks from tariffs to both sides of their mandate and said that they intend to wait for further clarity. We expect Chair Powell to repeat that message at the May Federal Open Market Committee (FOMC) meeting this week.
“If the economy deteriorates as the tariff shock hits, and in particular if FOMC participants conclude that the unemployment rate will trend higher unless they intervene, then we doubt that high inflation will deter them from cutting.
“We suspect that the Fed leadership would not worry too much about the risk of one-time tariff-driven price increases igniting persistently high inflation in a weak economy, and they would likely find it reassuring that a similar view is embedded in market-based inflation compensation,” it added.
Financial services heavyweight CME Group said there was a 97 per cent chance of the Fed holding rates today.
Some of Wall Street’s biggest banks believe that the Fed could choose to hold interest rates for the rest of the year.
Morgan Stanley’s chief US economist Michael Gapen said last month that tariffs would keep the Fed “on the sidelines” over 2025 unless the world’s biggest economy falls into a recession, while UBS Global Wealth Management economist Paul Donovan said further surprise tariff announcements made the Fed’s job more difficult.
Trump’s onslaught of attacks on Powell has diminished since he dismissed suggestions he was prepared to sack the Fed chair last week, a move that would tremble markets as it would represent an intervention on the Fed’s independence.
But economists will be watching closely to see how Powell responds to repeated demands from the US president at a press conference after the decision is announced.
The Bank of England’s Monetary Policy Committee (MPC) will also have an eye on the Fed’s analysis of the US’ economic outlook as lower growth could weaken demand for UK exports.
The MPC will release its decision on interest rates at 12:02pm on Thursday, with the majority of forecasters predicting a 25 basis point rate cut to 4.25 per cent.
The minutes to the MPC’s meeting will likely make key references to the US economy and take an initial view on what impact Trump’s tariffs will have on the UK economy.