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The Federal Reserve’s two-day policy meeting kicks off Tuesday morning, and its outcome could have a huge effect on the U.S. economy for the foreseeable future.
A lot has happened since Fed officials held their last policy meeting in mid-March. Two weeks later, President Donald Trump announced his “Liberation Day” tariffs that sent markets into turmoil.
When the Federal Open Market Committee convenes in Washington, D.C. on Tuesday and Wednesday, its members will discuss what actions to take — or not take — to give the economy the best chance of success in both the short- and long-term. The Fed is widely expected to keep interest rates where they are: The CME Group’s (CME) FedWatch tool calculates the odds of a rate cut at just 3.2%, though that number is up slightly from 1.8% last week. Bond traders are betting that an interest rate cut will come in July.
The Fed is in a difficult position. Hard economic data, like inflation and jobs numbers, show that the economy is in decent shape. But soft data, like consumer and CEO sentiment, has plunged in recent weeks, with Americans anticipating further inflation and fearing job losses.
That’s why the central bank is facing what the Wall Street Journal refers to as a lose-lose scenario: deciding between addressing inflation by keeping rates where they are, or combating weak growth by cutting rates.
High interest rates affect everything from personal loans to credit cards to mortgage rates, which in 2023 hit their highest levels this century. But taking action to shield the economy against a slowdown by cutting rates could have the undesired effect of adding to inflation pressures resulting from tariffs and shortages.
One economist last month predicted that store shelves would be empty and major retailers would go bankrupt by summer as the true effects of tariffs finally reach U.S. shores. And an automotive report in April revealed that America’s supply of cars available for sale is already declining. Diminishing supplies of goods could hasten inflation and the potential onset of a recession.
The Fed will consider all these factors as it decides what to do next. The policy decisions that result from the central bank’s meeting will be announced at a press conference Wednesday, May 7 at 2 p.m. Eastern.
This week’s session is the third of eight regularly scheduled meetings that the FOMC will hold in 2025.