Next Wednesday, 7 May, brings the first Federal Reserve interest rate decision since Donald Trump’s recent public criticisms of the central bank’s chair, Jerome Powell, with his threats to replace him spooking markets last month.
With less than a week before the Fed meeting, the US President was again calling for a rate cut.
The release of official job numbers on the Friday before the meeting seemed to add fuel to Trump’s ire.
“The Fed should lower its rate,” he posted online, citing a solid jobs market and “no inflation” as reasons to ease policy. “The economy is only in a transition stage, just getting started,” he said.
Despite political pressure, most economists and market participants do not expect the Fed to act next week. The probability of a rate cut at the May meeting is just 7%, based on pricing in overnight index swaps and Fed futures.
“Neither we nor money markets expect the Fed to cut as early as next week – which may prove a disappointment for the Trump administration,” said economist Kallum Pickering at London broker Peel Hunt, though he noted that the futures market suggests a better-than-even chance of a cut in June.
In fact, following the jobs number, investors pared their bets on Fed rate cuts this year, bonds sold off slightly and equity markets rallied.
Michael Hewson of MCH Market Insights also expects no change on 7 May. While acknowledging the recent contraction in US GDP of 0.3% in the first quarter, Hewson argues this figure was distorted by a front-loading of imports ahead of April’s steep tariffs.
“Given that this import effect is likely to reverse in Q2, it’s highly likely the Federal Reserve will look through this distortion when it meets,” he said.
Atakan Bakiskan, US economist at Berenberg, was another to opine that the Fed is unlikely to move just yet.
“We still expect the Fed to prioritise inflation over growth,” he said, projecting that core PCE inflation will rise from 2.8% to 3.2% by year-end.
With inflation drifting further from the 2% target, and businesses likely to pass on tariff-related costs to consumers, Bakiskan sees “no reason to cut in 2025.”
That said, the US labour market remains a key watchpoint.
While hiring plans have slowed, indicators such as job openings and unemployment claims do not yet signal a collapse. “Unless recessionary labour market conditions emerge, we believe the Fed will keep rates on hold,” Bakiskan noted.
More broadly, Berenberg sees growth weakening under the weight of Trump’s trade policy, estimating end-2025 GDP growth at 1.1%, down from 2.4% in February. Uncertainty around tariffs, immigration and fiscal policy has hit business confidence, capital expenditure and hiring, while retaliatory actions by trading partners add to the drag.
Pickering also addressed comments in the past week from US Treasury Secretary Scott Bessent, who pointed to the inversion between two-year Treasury yields and the Fed funds rate as a market signal for easing.
“Bessent is right that two-year rates can signal Fed moves,” Pickering said, but added that markets had been pricing cuts for some time. “If Powell pushes back hard next week, short-term rates could tick back up.”
Despite that, Pickering sees the Fed cutting in June and delivering three rate cuts this year. “The Treasury Secretary is probably not wrong in his assessment – just a month early,” he concluded.
As for next Wednesday, analysts expect the Fed to strike a dovish tone while holding rates steady, resisting political pressure.
As Hewson put it, Powell is likely to avoid being drawn into the fray: “For the sake of everyone, and to use a cricketing metaphor that few of our US friends will understand, he should dead-bat them all.”
