However, with inflation not yet fully under control and fresh trade policies threatening to raise prices, fed officials face a growing dilemma: fight lingering inflation or brace for a possible slowdown.
Inflation Cools More Than Expected in April
US inflation came in softer than anticipated in April, according to data from the Bureau of Labor Statistics.
Annual consumer price inflation slowed to 2.3%, down from 2.4% in March, marking the lowest level since February 2021 and falling short of the 2.4% forecast cited by FXStreet.
Core inflation, which strips out volatile food and energy prices, held steady at 2.8% year-on-year, in line with expectations.
On a monthly basis, headline CPI rose 0.2% in April, following a 0.1% decline in March, but again missed the projected 0.3%. Core CPI also rose 0.2%, similarly underperforming the 0.3% consensus.
Latest CPI Data Put Pressure on US Dollar
Latest inflation data put particular pressure on the U.S. dollar, which was already hit by the trade war between the U.S. and China.
Erik Boekel, Chief Commercial Officer at DHF Capital, told CCN, “After declining during the previous session, the U.S. dollar could remain under pressure after headline inflation eased to 2.3% in April, below expectations of 2.4%, marking the lowest level since February 2021.”
“The softer-than-expected reading could reinforce expectations that the FederalReserve could adopt a more dovish stance, weighing on the greenback. However, the full impact of tariffs may still be unfolding, adding a layer of uncertainty,” he added.
In the bond market, U.S. longer-term yields stabilized after a rise, with the 10-year yields settling below 4.47% as traders scale back expectations of a hawkish Fed.
Analysts Say There’s No Need To Cut Rates
Despite renewed calls from former President Donald Trump to cut interest rates, market analysts largely agreed with the Federal Reserve’s decision to keep policy unchanged, citing stable economic data and ongoing inflation risks.
“There was little reason to cut now, given the continuing constructive hard economic data, but also the risk of higher inflation,” said Gerrit Smit, lead portfolio manager at Stonehage Fleming’s Global Best Ideas Equity Fund.
“It would not have served any particular fundamental economic purpose to cut rates just yet,” Smit added.
Michael Brown, senior research strategist at Pepperstone, echoed that view, noting subtle changes in the Fed’s policy statement, particularly around inflation concerns.
“It was no surprise to see a few tweaks in the language, especially with the Committee now acknowledging the danger of ‘stagflation,’” he said.
The FOMC flagged rising risks to both inflation and employment, while pointing to a murkier economic outlook overall.
Brown added that the Fed’s dismissal of weak first-quarter GDP numbers as a result of “chunky swings in net exports” felt like a convenient way to downplay disappointing data.
Powell Sees Slower Growth, Steady Labor Market
Federal Reserve Chair Jerome Powell said Tuesday that the U.S. economy remains resilient despite growing uncertainty from trade tensions and President Donald Trump’s new tariffs.
While acknowledging recent market volatility and weaker sentiment data, he said the labor market remains strong and inflation, while still slightly above target, has cooled from earlier highs.
“The labor market is near maximum employment, and while inflation has come down significantly, it still runs slightly above our 2% target,” Powell added.
While Powell noted that consumer spending has held up—buoyed in part by strong vehicle sales—he warned that higher imports, driven by businesses rushing to front-load orders ahead of potential tariffs, are likely to weigh on economic growth in the near term.
Sentiment among households and businesses has declined sharply in recent surveys, a shift Powell attributed largely to concerns over trade policy. Independent forecasts also suggest the economy is likely to continue expanding, though at a slower pace.
On inflation, Powell said recent data show continued progress: total personal consumption expenditures (PCE) prices rose 2.3% year over year, while core PCE—excluding food and energy—increased 2.6%.
“Inflation has eased substantially from its 2022 highs without causing a painful rise in unemployment — a positive sign. However, new policy changes, particularly tariffs, pose upside risks to inflation and uncertainty about future economic conditions,” Powell said.
Monetary Policy in a Shifting Environment
According to Federal Reserve Chair Jerome Powell, ongoing policy shifts in trade, immigration, fiscal matters, and regulation are still taking shape, and their full impact on the economy remains unclear.
“Early indications suggest that tariffs could contribute to higher inflation and slower growth,” Powell said. “Measures of near-term inflation expectations have risen significantly, even though longer-term expectations appear stable for now.”
He added that the Fed’s priority is to prevent any temporary price increases from turning into a sustained inflationary trend.
“Anchoring long-term inflation expectations is critical,” Powell said. “If price pressures build or inflation expectations increase, we will take appropriate action to maintain stability—while also weighing the effects on employment.”
Powell acknowledged that balancing the Fed’s dual mandate—price stability and maximum employment—could become more difficult if economic goals begin to diverge.
“In such a case, we would evaluate how far the economy is from each target and adjust policy accordingly, recognizing that closing those gaps might occur on different timelines.”
Powell noted that the Fed is in a good position to wait for more clarity before making further policy adjustments.
“We will continue to closely monitor economic data and remain committed to achieving both stable prices and maximum employment,” he said. “Elevated unemployment or inflation are both harmful, and we will do everything necessary to support a strong and stable economy.”
Fed Ready To Intervene in Financial Markets
Boston Fed President Susan Collins said on Friday that the Federal Reserve is “absolutely” ready to stabilize financial markets if needed, following market turmoil sparked by President Trump’s new tariffs.
Trump announced broad import taxes on April 2, later softening them for many countries while imposing a 145% tariff on Chinese goods. Collins noted that higher tariffs could slow growth and increase inflation, which she expects to rise “well above” 3% this year without a major economic downturn.
Fed officials, who are increasingly vocal, have expressed concern about inflation expectations. A University of Michigan survey reported consumer confidence falling and inflation expectations rising sharply, with short-term inflation at 6.7%, the highest since 1981.
However, market-based inflation forecasts remain closer to the Fed’s 2% goal. St. Louis Fed President Alberto Musalem cautioned against underestimating the inflationary impact of tariffs.
At the same time, New York Fed President John Williams projected GDP growth below 1% and inflation between 3.5–4% due to policy uncertainty.
Markets currently predict a 60% chance the Fed will hold interest rates steady at its next meeting.
Tariffs Expected to Boost Inflation
With a 10% universal tariff on most imports and reciprocal tariffs as high as 54% on nations such as China, the U.S. administration has reignited inflationary pressures that were just beginning to cool.
The base case for asset managers is clear: a sustained higher interest rate environment is here, at least for now.
Nuwan Jayawardana, CFA, Director of Investment Research at Acuity Knowledge Partners, told CCN, “The Fed’s inflation-fighting mandate all but demands that policy rates remain elevated, as cost-push inflation from tariffs drives up consumer and producer prices.”
For Jayawardana, “Recent commentary from Fed officials – including Chair Powell – has flagged the inflationary effects of the new tariffs, with concerns that trade policy could prolong price pressure and delay disinflation. This reinforces the view that monetary easing is unlikely in the near term.”
“Do the right thing,” Trump wrote on Truth Social after the Fed held rates steady while lowering its growth outlook and raising its inflation forecast.
Trump has downplayed concerns over potential economic disruption from his planned trade measures, acknowledging there may be “a little disturbance” but insisting the U.S. is on the brink of a “golden age.”
He has declared April 2—when his “reciprocal tariffs” take effect—”liberation day” for the U.S. economy.
Still, he wants the Fed to act preemptively. “The Fed would be much better off cutting rates as U.S. Tariffs start to transition (ease!) their way into the economy,” he posted.
Uncertainty Shouldn’t Paralyze Rate Moves
Federal Reserve Governor Christopher Waller stated that he expects the Trump administration’s new tariffs to have only a modest and temporary impact on prices, suggesting the central bank should largely disregard them when setting monetary policy.
In a speech at the University of New South Wales in Australia, Waller emphasized that uncertainty over trade policies shouldn’t delay Fed action if economic conditions warrant it.
He cited Russia’s 2022 invasion of Ukraine and the 2023 collapse of Silicon Valley Bank as examples.
“My baseline view is that any imposition of tariffs will only modestly increase prices and in a non-persistent manner. So I favor looking through these effects when setting monetary policy to the best of our ability,” Waller said.
He acknowledged the possibility of a larger impact but noted that other policy measures could also help ease inflationary pressures.
“At the end of the day, the data should be guiding our policy action—not speculation about what could happen,” Waller added.
Keeping Rates Around 4%
According to BlackRock’s analysts, in 2025, the Fed will likely reduce rates further to around 4% and then pause, depending on inflation and labor market data.
BlackRock highlighted the Fed’s Summary of Economic Projections (SEP), which suggests a potential range for the federal funds rate between 3.75% and 4%. Long-term rate expectations vary, with hawkish projections around 3.9% and dovish ones near 2.4%.
Fed funds rate expectations. | Credit: BlackRock
As of late 2024, inflation remains above the 2% target, prompting Fed Chair Jay Powell to emphasize caution on further rate cuts.
Persistent inflationary pressures from geopolitical fragmentation, AI investment, and the low-carbon transition suggest long-term yields may stay elevated.
Given this outlook, investors might consider short-duration bonds, laddering strategies, and non-core income opportunities to manage interest rate risk and enhance returns.
Interest Rates Impact on Financial Markets
Projections and decisions regarding interest rates hold immense sway over the broader economy. They affect various financial markets, including equities, bonds, and commodities.
The Fed’s key tool in this regard is the Federal Funds Rate (FFR). This is the base interest rate that influences banks, bond markets, and the economy. The Fed makes these rate decisions during its FOMC meetings, held eight times yearly. The rate adjustments in 2022 brought about several hikes, with more in store for 2023.
The increase in FFR, in turn, leads to a rise in the prime rate, the fundamental interest rate charged by banks to creditworthy customers. If the FFR goes up, so does the cost of loans and mortgages. This uptick in the cost of servicing loans translates to reduced discretionary income for consumers and businesses. This, in turn, can dampen overall demand and mitigate inflationary pressures.
Federal Reserve’s fund rates decreased during weak economic periods.
The implications for stocks are twofold: consumer-dependent sectors like retail and hospitality may face headwinds due to reduced consumer spending. Growth stocks that rely on capital and borrowing could also suffer. This is as investors shift their focus toward more stable, value-oriented investments in response to market volatility and potential downturns.
Pressure On Bonds
From a mechanical perspective, rising interest rates put downward pressure on bond values. As rates climb, the bond yield becomes less attractive than the prevailing base rate, leading to a sell-off in bonds.
This effect is particularly pronounced in the case of long-term bonds. In this case, the discrepancy between their yield and the base rate grows over time.
As a result, fixed-income securities also lose value as the opportunity cost of not owning interest-rate-tracking assets increases. Thus, predicting interest rates over the next five years becomes a critical indicator of market trends.
Historical Perspective on Interest Rate Policy
The U.S. has experienced periods of both high and low interest rate volatility in its history. In the postwar era of the 1950s, the FFR remained below 2%, bolstered by postwar stimulus and income growth. Over the next two decades, the rate fluctuated between 3% and 10% during the 1960s and 1970s, soaring to a record high of 19.1% in 1980 amid rampant inflation.
As the U.S. economy stabilized and inflation was controlled, the FFR hovered around 5% throughout the 1990s. However, recessions in 2001 and 2008 forced rates down to historically low levels, where they remained until 2016.
The COVID-19 pandemic necessitated another significant rate cut, nearly to zero. In 2022, the Fed increased rates seven times, followed by three hikes in 2023. The central bank brought the rate to its current range between 5.25% and 5.50%, the highest level in 16 years.
Factors Influencing Future Interest Rates
The Fed now faces the challenge of navigating uncertain economic conditions. These are marked by rising prices and an economic slowdown compounded by supply chain disruptions. Inflation, as well as the potential for a recession, is a top concern.
High Inflation
Inflation has been a focal point for central bank action. In 2022 and 2023, inflation accelerated due to a mix of demand and supply factors, sometimes interconnected. The Fed’s more hawkish stance appeared to have contributed to moderate price increases.
The rhetoric shifted in July. Official data from the U.S. Labor Department revealed that the inflation rate had reached 3.2% year over year. Costs of housing, car insurance, and food drove this increase.
This marked an uptick from June, which had seen the lowest rate over two years, at 3%. Analysts had anticipated this rise in the headline rate, considering the relatively weak price inflation observed in the previous July.
U.S. consumer price inflation peaks and lows
U.S. Dollar Resilience
Despite economic turbulence, the U.S. dollar has remained remarkably resilient. Its status as a safe-haven currency, coupled with increased investor appeal due to the Fed’s hawkish monetary policy, has bolstered its performance. However, as the Fed’s monetary tightening slows and potentially pauses, the strength of the U.S. dollar appears to be waning.
USD performance.
Projected Interest Rates in the Next Five Years
Analysts primarily focus on near-term interest rate forecasts, but long-term projections extend over the next several years. These forecasts offer valuable insights into interest rate expectations.
ING’s interest rate predictions indicate that in 2024, rates will start at 4%, with subsequent cuts to 3.75% in the second quarter, 3.5% in the third, and 3.25% in the final quarter. In 2025, ING predicts a further decline to 3%.
The University of Michigan inflation expectations in the U.S. for the five-year outlook were revised slightly higher to 3% in August 2023. This exceeds the preliminary estimate of 2.9%, matching July’s reading.
Rate Cuts On The Horizon?
Economic growth was between 1.2% and 1.7% in 2024 and 1.5% and 2% in 2025. Analysts saw core PCE inflation falling between 2.4% and 2.7% in 2024 and 2% and 2.2% in 2025.
Meanwhile, experts surveyed by Trading Economics note a decline in U.S. consumer inflation expectations for the coming year.
Expectations for year-ahead price growth have shifted, with gas decreasing by 0.2% to 4.5% and food by 0.1% to 5.2%, the lowest since September 2020. Medical care will decrease by 0.9% to 8.4%, the lowest since November 2020, and college education by 0.3% to 8%. Rent will fall by 0.4% to 9%, the lowest since January 2021.
Also, median home price growth expectations decreased to 2.8% in July from 2.9% in June. Meanwhile, consumers also see lower inflation in three years at 2.9% from a previously expected 3% and in five years at 2.9% from 3%.
Factory, Labor, And Wages Trends
Manufacturing activity displayed mixed results, though multiple districts showed a brighter outlook for the sector.
The labor market showed signs of easing nationwide. Most districts reported slight to moderate increases in overall employment. This, albeit with a reduced sense of urgency among firms in their hiring efforts. However, recruiting and hiring skilled workers remained challenging.
Wage growth remained moderate, with candidates showing less resistance to wage offers. Many firms adjusted their compensation packages to offset higher labor costs. They incorporated measures like remote work options instead of wage increases, reduced sign-on bonuses, or other enhancements.
Price trends indicated modest overall increases, with input costs stabilizing or slowing for manufacturers while continuing to rise for service sector businesses.
Factors such as fuel costs, wages, and insurance contributed to price growth. Sales prices increased slower than input prices as businesses grappled with passing on cost pressures. This was due to heightened price sensitivity among consumers, which impacted profit margins.
In the coming quarters, firms generally anticipate price increases, but at a slower pace than previous periods. Several districts reported fewer firms expecting significant price hikes in the foreseeable future.
How Do Interest Rates Affect Crypto?
Bitcoin and other digital assets have demonstrated resilience in a rising interest rate environment. For instance, Bitcoin experienced remarkable growth of 2,000% in 2015 and 2016, during a period marked by rising interest rates.
Nevertheless, some experts argue that persistently high inflation, gas prices, and energy costs resulting from elevated interest rates may dampen risk appetite, potentially posing headwinds for cryptocurrencies.
Central Banks and Connection With Cryptocurrencies
Central banks wield significant influence, directly affecting money circulation and financial market stability. They have the power to modify interest rates, which, in turn, affects the borrowing rates for financial and banking institutions. Recently, central banks in major developed economies, such as the Fed, ECB, and BoE, have increased interest rates in response to widespread inflation.
Notably, cryptocurrencies are increasingly intertwined with these macroeconomic and monetary shifts. In particular, the decisions to raise interest rates, especially by the Fed, directly affect the cryptocurrency markets.
In simpler terms, the Fed’s more assertive stance has cast a shadow over cryptocurrencies, impacting market sentiment as tighter monetary policies loom.
