Federal Reserve rules out liquidity injection, expects Trump’s actions to kill rate cut plans

The US Federal Reserve will not inject more liquidity into the system anytime soon, even if the job market slows down.

Officials said the inflation risks tied to President Donald Trump’s new tariffs are too big to ignore and they’re not rushing into decisions that could undo the work they’ve done fighting inflation since 2022.

According to Bloomberg, the Fed plans to keep rates steady and is not offering insurance cuts to help markets ride out the impact of Trump’s tariffs. Officials said they want to prevent a long-term spike in prices, and they’re not moving unless unemployment jumps hard. They also told Wall Street that it’ll take more than financial market panic to push them into action.

Fed holds its ground while tariffs reshape inflation outlook

Minneapolis Fed President Neel Kashkari said on Wednesday that tariffs make rate cuts harder to justify. “The hurdle to change the federal funds rate one way or the other has increased due to tariffs,” Kashkari said. “The bar for cutting rates even in the face of a weakening economy and potentially increased unemployment is higher.”

Meanwhile, Chair Jerome Powell reiterated to reporters on Friday that they’re not in a hurry and that they are carefully watching how Trump’s tariff moves play out. He didn’t commit to any policy change soon. Powell said, “We’re going to need to wait and see how this plays out before we can start to make those adjustments.”

After Trump announced the new import levies on April 2, markets reacted fast. But on Wednesday, he pulled back from some of them. He canceled plans to slap reciprocal tariffs on several trading partners. Despite that, he raised tariffs on Chinese goods to 125%, keeping overall trade pressure high. Bloomberg Economics said that even with those rollbacks, the average US tariff only dropped from 27% to 24%. That’s still high.

Beth Hammack, who leads the Cleveland Fed, said they’re staying patient. In an interview Wednesday, she said, “It’s a really active choice on our part that we really need to see where things are going to go.” She also said, “I would much rather wait and move in the right direction than move quickly in the wrong direction.”

Officials, including St. Louis Fed President Alberto Musalem and Fed Governor Adriana Kugler, said the Fed has to keep its focus on inflation. They both said the labor market still looks fine for now, which gives them space to wait. They’re watching for a jump in job losses, but they don’t see one yet.

New inflation numbers released Thursday showed prices cooled last month. The Fed’s preferred measure of core inflation dropped to 2.8% for the year through March, based on data from the Bureau of Labor Statistics. But even with that dip, the Fed isn’t changing its plans. They expect the new tariffs to keep pushing prices up.

Fed won’t cut rates without major job market collapse

Derek Tang, an economist at LH Meyer/Monetary Policy Analytics, said rate cuts probably aren’t coming at all this year. “Longer-term inflation expectations have been quite stable. The issue is how long can they remain stable when you have a price shock,” he said.

After the Fed’s slow reaction to the post-pandemic inflation surge, officials said they don’t want to mess it up again. Inflation hit 7.2% in 2022. Now it’s down to 2.5% for the year through February, but that’s still above the Fed’s 2% target.

Jeremy Schwartz, an economist at Nomura, said it would take a major rise in unemployment to force the Fed to act. “It would likely take widespread layoffs, a sharp move higher in filings for unemployment benefits and a significant rise in joblessness for the Fed to move more aggressively,” he said.

Schwartz said maybe one cut could come in December, but even that’s a stretch. “Not only is inflation too high and it’s been above target for years and years now, but also it’s going to be moving against them,” he said. “Cutting in that backdrop really risks the Fed’s credibility on getting inflation back to target.”

Cryptopolitan Academy: Want to grow your money in 2025? Learn how to do it with DeFi in our upcoming webclass. Save Your Spot