Why the Federal Reserve Isn't Cutting Interest Rates Despite Cool Inflation

The central bank is in a holding pattern as it waits to see what worsens first: inflation or the labor market

- Nick Timiraos

Here are good reasons to think the Federal Reserve would be preparing to cut interest rates this week due to recent improvements on inflation—if not for the risk that tariffs pose to prices.

Instead, Fed officials are on track to extend their wait-and-see posture on Wednesday. Fed officials at their meeting will be assessing how the economy handles the initial months of historically large tariff hikes. The last three months' inflation readings have been mild. Still, officials are worried over how tariff announcements since March could disrupt what economists refer to as "inflation expectations."

Inflation expectations—or what consumers and businesses perceive—could be more fragile because of an oil shock from leading to higher inflation.

The upshot: Whether and how much the Fed cuts interest rates this year will rest in part on how officials view the risks to inflation expectations.

For consumers, this debate isn't academic. If the Fed keeps rates higher for longer, mortgage rates may stay elevated and business investment could slow. But if the Fed cuts rates and consumers and businesses have more cushion to tolerate price increases, even more painful rate hikes could be necessary later to wring out inflation.