Why Trump—and Investors—Will Probably Be Disappointed by the Fed This Week

With the Federal Open Market Committee scheduled to meet on May 6 and 7, all eyes are on the actions (or inactions) of the Federal Reserve. President Donald Trump has been vocal about his desire for the Fed to cut interest rates, as evidenced by his recent posts on social media, notably one in which he exclaimed in all caps, “NO INFLATION, THE FED SHOULD LOWER ITS RATE!!!” But while both Trump and investors are rooting for a rate cut, the likelihood of this happening appears slim.

Trump’s Push for Rate Cuts

Lowering interest rates is a priority for Trump, as it could spur economic growth and, in turn, boost the stock market. A booming stock market reflects positively on a president’s performance, potentially influencing friendlier relations with Wall Street. Historically, lower interest rates lead to easier access to borrowing, thereby facilitating investment and consumer spending. However, Fed Chair Jerome Powell has signaled that the central bank is not under urgent pressure to cut rates, suggesting a divergence in views between Trump and the Fed.

According to Steve Sosnick, chief strategist at Interactive Brokers, there is a question about whether the market has overly anticipated a supportive stance from the Fed given the current uncertainties surrounding tariffs and immigration policies. If the Fed doesn’t cut rates, investors could face painful repercussions as the market may need to reassess the rapid gains made over the past weeks, particularly after a nine-day rally where the S&P 500 surged more than 10%.

Why the Fed May Hold Steady

The Federal Reserve has already initiated a series of rate cuts beginning last September, followed by additional cuts in November and December. During the December meeting, Powell made it clear that the expected pace of cuts for 2025 would be reduced, moving from a forecast of 100 basis points to just 50. Several factors have underscored this cautious approach—namely, the potential effects of Trump’s tariffs on inflation and the overall economic landscape.

Sameer Samana of Wells Fargo Investment Institute pointed out that the Fed sees the current rate range of 425-450 basis points as fairly neutral. The uncertainty brought about by new tariffs and policies has further complicated the Fed’s capacity to make decisions based on concrete economic data.

The Divergence Between Economic Data

Investors are grappling with a dichotomy between “hard data”—statistics that reflect actual economic performance—and “soft data,” which incorporates sentiment surveys and can often be misleading. While hard data may be stable, indicators of consumer confidence and industrial activity have shown signs of weakening. Janet Bond, a portfolio manager at Jensen Investment Management, noted, “We haven’t seen too many cracks yet in the hard data,” which adds to the Fed’s hesitation regarding rate cuts.

Investor Reactions to Fed Signals

The tumultuous market hit a snag on April 4, the day Trump announced sweeping tariffs, with Powell asserting that there was no need for an urgent response from the Fed. This led to a 6% decline in the S&P 500. Following Powell’s cautious remarks on the economic implications of tariffs, the stock market reacted negatively, further deepening investor anxiety and leading to another dip of 2.2%. Trump’s subsequent criticisms of Powell and the Fed heightened fears about the central bank’s independence, a critical feature that draws international investors to the U.S. market.

Looking Forward to the Upcoming Fed Meeting

The market remains in a state of optimism heading into the Fed meeting, as evidenced by the S&P 500’s impressive nine-day winning streak, its longest in over two decades. However, this optimism may be misplaced. The CME FedWatch Tool indicates a 99.5% probability that the Fed will maintain the current target rate this month, while also pricing in potential cuts by the end of 2025. If the Fed decides against a May rate cut, investors will be keenly listening for comments regarding future changes, especially as the 90-day tariff pause is set to expire in July.

Sosnick suggests two scenarios that could lead to future rate cuts—one being a significant easing of price pressures that would compel the Fed to act, and the other a weakened economy that would necessitate intervention. Both scenarios come with their own risks and challenges.

Conclusion

As the Fed prepares to meet, both Trump and investors hold out hope for a rate cut that may ultimately not come to fruition. Market participants are reminded that the decisions made by the Fed are driven by careful analysis, often at odds with political pressures. While short-term gains provoke optimism, a long-term focus on economic fundamentals remains essential for sustainable growth.