Fed will likely hold rates steady, but ‘bad-news cuts’ in the fall are likely.

Economists predict that the Federal Reserve will maintain its benchmark interest rate at this week’s meeting, remaining in a “wait and see” stance as President Donald Trump’s tariff measures are predicted to cause problems by increasing inflation and slowing economy this year.

According to Diane Swonk, chief economist at KPMG, the main question going forward is whether Fed officials can see through an expected increase in inflation and lower rates as markets predict or if they choose to hold off until they are certain the inflation bump will only last temporarily.

In an interview with MarketWatch, former Boston Fed President Eric Rosengren stated that he now believes the economy would weaken enough later this year that both hawks and doves on the Fed will agree to cut once or twice in the fall.

“I had originally assumed that the tariffs weren’t going to be substantial and I had no change in policy over the course of this year, but my expectation now is that the economy will weaken sufficiently that they’ll be easing, basically for the wrong reason,” Rosengren stated.

According to him, he anticipated that this year’s GDP would only expand by 1% annually.

According to him, there is a 30% chance of a recession. Under typical conditions, those odds are about 15%.

Following 100 basis point rate decreases in 2024, the Fed has maintained its benchmark rate between 4.25% and 4.5% so far this year.

Since inflation has been higher this year, the Fed cannot make a cut unless it receives bad statistics. Furthermore, the University of Michigan’s inflation predictions have increased.

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According to Robert Kaplan, the former president of the Dallas Fed, investors should be aware that the Fed will be “more reactive rather than proactive” this year and won’t be able to lower rates at the first indications that the economy is faltering since inflation is sticky.

According to Fed Chair Jerome Powell, the present rates are “restrictive,” which means they are high enough to gradually lower inflation.

That eventually allows Powell to lower interest rates, according to SGH Macro Advisors chief economist Tim Duy.

“With the Fed in wait-and-see mode, the March FOMC meeting is expected to be a non-event. However, we see it as a complex meeting with more than normal market risk,” Evercore ISI vice chairman Krishna Guha stated.

Powell has stated that the Fed doesn’t have to act quickly in an attempt to allow himself some leeway.

“Being careful has incredibly minimal costs. The economy is doing well. In his final remarks prior to the Fed meeting, Powell stated, “We can and should wait because it really doesn’t require us to do anything.”

In four major areas—trade, immigration, fiscal policy, and regulation—the Fed wants to comprehend the “net effect” of Trump’s policy initiatives, according to the Fed chairman.

That will be a difficult calculus, according to economists.

Duy stated that he believed Powell “will lean hawkish near term but not dissuade financial market participants from anticipating rate cuts in the year ahead.”

Any aggressive tone in Powell’s remarks could disappoint the markets, according to Vince Reinhart, chief economist at BNY Investments.

The Fed scheduled two rate decreases for this year in December. According to updated forecasts announced this week, that is not anticipated to alter.

At 2:00 PM on Wednesday, the Fed will release its policy statement and revised economic projections.

Roger Ferguson, a former vice chairman of the Fed, stated that he did not believe the Fed would make any changes in May.

“I think the market, if it gets itself into a place where they’re expecting a cut in the next meeting, is probably going to be disappointed,” he stated in a CNBC interview.

Since June, there have been three quarter-point reductions for derivatives market traders this year.

According to Wilmington Trust chief economist Luke Tilley, “the Fed is trying not to make any changes [to rates].” The best they can do is to wait until the data permits them to do so, provided that the economy does not appear to be in a state of collapse and inflation does not appear to be on the rise.

The February retail sales figures have allayed fears that the economy is already in decline.

According to commentators, that allows Fed officials time to consider their response to the president’s economic policies. The Fed will keep a close eye on any early indications that the economy may be faltering, but it is too soon to intervene.

Trump’s proposed tariffs are expected to raise costs this year, according to economists. Next year, they will harm the economy and lessen inflationary pressures.

Although the personal consumption expenditure price index, the Fed’s preferred indicator of inflation, has declined from its peak of almost 7%, it has been obstinate lately, averaging 2.5% annually.

Torsten Slok, chief economist at Apollo Global Management, estimates that the Trump tariffs, as announced by the White House, will increase core PCE inflation by about 0.5 percentage points.

This will maintain inflation in the region of 3%, which is too high for many Fed officials.

In order to persuade the Fed to lower interest rates, Claudia Sahm, the head economist at New Century Advisors and a former Fed employee, concurred.

According to Sahm, either the labor market will significantly worsen and the Fed will enter a more aggressive cutting cycle, or the Fed will continue to do nothing.

“If it is a sufficient enough deterioration, the hawks come along with it,” she stated.

Wilmington Trust’s Tilley stated that he believes this year’s cutbacks will be 100 basis points.

He stated, “I think consumers are not that strong” and that tariffs represent a significant tax increase. “It is going to pull the economy down.”

With growth falling below 1% in the third quarter and inflation reaching 4% in the fourth, James Egelhof, chief U.S. economist at BNP Paribas, believes the Fed will be on hold until 2026.