All Eyes on the Fed This Week — Even Without a Rate Cut

The Federal Reserve is set to hold its policy meeting on May 6–7, and while no interest rate cut is expected, markets and political leaders—including former President Donald Trump—will be watching closely.

Trump has repeatedly called for lower rates, arguing that inflation is under control and that cheaper borrowing costs would boost the economy and markets. On Friday, he took to Truth Social with an all-caps post: “NO INFLATION, THE FED SHOULD LOWER ITS RATE!!!”

Lower rates could support economic growth and strengthen Trump’s economic platform, but the Fed has shown no urgency to move. Chair Jerome Powell and the central bank remain cautious, pointing to inflation risks tied to Trump’s own policies, including tariffs and immigration restrictions.

After three rate cuts in late 2024, Powell signaled in December that further reductions would be limited. The Fed’s projections, or “dot plot,” now show just 50 basis points of cuts in 2025—half the amount anticipated earlier. That shift triggered a nearly 3% drop in the S&P 500.

Part of the Fed’s hesitation stems from the uncertainty surrounding Trump’s economic agenda. New tariffs, tightened immigration enforcement, and shifting trade policies haven’t fully worked their way through the economy. Many of the announced measures have been delayed or revised, complicating the Fed’s decision-making process.

“There’s a real divide between hard economic data and softer indicators like sentiment surveys,” said Allen Bond, portfolio manager at Jensen Investment Management. “We’re starting to see weakness in the soft data, but not yet in the hard numbers.”

Trump’s Attacks on Powell Rattle Markets

Tensions between Trump and Powell flared in April, after Powell warned that tariffs could drive inflation higher and emphasized a wait-and-see approach. Markets fell sharply—6% on April 4 and another 2.2% on April 16—on concerns that the Fed wouldn’t act swiftly enough to counter economic disruptions.

Trump lashed out at Powell, calling him “Too Late Jerome” and suggesting he could fire him—comments that alarmed investors and raised concerns about the Fed’s independence. The S&P 500 dropped another 2.4% the day Trump made those remarks.

According to Steve Sosnick, chief strategist at Interactive Brokers, Fed independence is one of the reasons global investors trust U.S. markets. Undermining that trust can have serious consequences. “Casting doubt on the Fed’s autonomy shakes investor confidence,” Sosnick said.

Trump later walked back his threat to fire Powell, and markets quickly recovered. The S&P 500 launched into a nine-day winning streak—the longest in more than 20 years—fueled partly by optimism over trade talks and relief that the Fed’s independence was intact.

What Comes Next

As this week’s Fed meeting approaches, markets are riding high. But investors know the rally may be vulnerable if Powell doesn’t deliver the dovish tone they’re hoping for. According to the CME FedWatch Tool, there’s a 99.5% chance the Fed will hold rates steady in May, with markets still pricing in three cuts by year-end.

Still, Powell has made it clear that the Fed wants more clarity—particularly on the inflationary effects of tariffs—before making any policy moves. With the current 90-day pause on new tariffs ending in July, June could also be too soon for a rate cut.

Sosnick sees only two scenarios where rate cuts are likely: either inflation slows significantly, or the economy deteriorates enough to force the Fed’s hand. “The second scenario is one where you have to be careful what you wish for,” he warned.

Markets ended last week on a strong note. The S&P 500 rose 2.9%, the Dow gained 3%, and the Nasdaq climbed 3.4%. Both the Dow and S&P 500 logged nine-day win streaks—something not seen since 1992.

The question now: Will Powell’s remarks keep the rally alive, or reset expectations?