Fed Unlikely to Cut Rates in the Near Term? Wall Street Points to Broader Conditions and Middle East Tensions

As Federal Reserve officials continue to indicate a steady policy stance, investors and economists this week are turning their attention to Chair Jerome Powell’s statements following the rate decision announcement, in search of clarity on what factors might eventually prompt the central bank to take action—and when.

Wall Street analysts broadly agree that a rate cut is unlikely in the short term. Policymakers appear to require stronger justification before moving forward with any easing measures, particularly as the current economic environment shows no clear signs that would warrant immediate intervention. Although the pace of job growth has slowed, the unemployment rate has remained stable for three consecutive months. This stability, partially attributed to a sharp decline in immigration that has constrained labor supply, allows the Federal Reserve to keep interest rates steady for a longer period in an effort to contain potential inflationary pressures.

Former Cleveland Fed President Loretta Mester noted that the outlook for the second half of the year remains uncertain. While recent labor and inflation data have been encouraging, she cautioned that the key issue is whether those trends will persist. Until there is greater clarity regarding the scope and scale of tariffs, their impact on inflation, and how such policies—including the budget bill—will affect economic growth and employment, Mester emphasized that the Federal Reserve is unlikely to take action.

Brent Schutte, Chief Investment Officer at Northwestern Mutual Wealth Management, stated that a rate cut before September would likely require a significant deterioration in the labor market. He also warned that inflation remains a concern, especially as the impact of tariffs has yet to be fully understood. According to Schutte, it is premature to conclude that tariffs will not affect inflation. He explained that importers, consumers, and businesses may have increased inventories in anticipation of tariffs, and such behavior could distort current inflation figures. Historically, these effects take time to appear in official data. He characterized the current environment as a “wait-and-see period” for the Fed, adding that unless labor market weakness becomes clearly visible, the likelihood of a rate cut before September remains low. However, he also questioned whether delaying action until then might prove too late.

Ryan Wang, U.S. economist at HSBC, acknowledged the dual risks posed by tariffs. While commodity prices may continue to rise through the rest of the year, early signs of a cooling labor market could exert downward pressure on inflation and potentially offset some of the risks. Wang emphasized that the Fed must be confident that inflation will not spiral out of control and that economic activity will not decelerate too sharply. He noted that a favorable environment for rate cuts will take time to emerge.

Carl Weinberg, Chief Economist at High Frequency Economics, similarly indicated that the Federal Reserve currently has little basis for adjusting interest rates. He added that if former President Trump had not implemented tariff policies, the Fed might already be considering a rate cut to support economic activity.

Developments in the Middle East have added another layer of complexity. On Friday, Israel launched an unprecedented attack on Iran’s nuclear and military facilities, resulting in a sharp spike in global oil prices. This escalation has raised concerns among investors and analysts about the potential for rising global inflation, including in the United States, which could prompt the Fed to extend its current holding pattern.

Robert Sockin, Senior Global Economist at Citigroup, stated that if the conflict deepens and oil prices remain elevated, the challenges already facing the Fed will become more pronounced. He noted that tariffs could further drive up inflation. Sockin added that Federal Reserve officials are not rushing to cut rates, given the uncertainty surrounding the economic effects of tariffs. However, if inflation risks continue to rise, any rate cut may be postponed until the end of the year.

John Velis, Americas Macro Strategist at BNY Mellon, remarked that while monetary policy is not particularly suited to address geopolitical shocks, such developments do suggest that the Federal Reserve will proceed with increased caution.