From: allin
The Federal Reserve (Fed) has maintained a steady interest rate range of 4.25% to 4.5% in 2025, following previous cuts of 50 basis points (bips) in September and 25 bips in November and December of the prior year [00:12:11]. The Fed’s current “wait and see” approach is largely influenced by uncertainty surrounding former President Trump’s tariffs and their potential impact on the economy [00:12:27].
Economic Outlook and Fed Policy
Despite continued economic expansion, the Fed has expressed concerns about potential stagflation, warning of risks associated with higher unemployment and inflation [00:12:35]. There are reports of increasing apprehension regarding impending layoffs [00:12:49].
One perspective suggests that the Fed’s decision not to cut rates could signal economic strength rather than weakness [00:13:20]. The market, which largely recovered from Trump’s tariff announcement, was bolstered by the government’s willingness to intervene and the Fed’s stance that it would not cut rates solely to bail out the equity market. Instead, the Fed indicated it would act to restore liquidity if market function was compromised [00:14:22]. This situation is viewed more as a “tariff correction or tariff tantrum” than a full-blown “tariff crisis” [00:14:50].
Economic Sentiment vs. Hard Data
A notable disconnect exists between consumer sentiment and actual economic activity. While consumer sentiment appears weak, spending remains remarkably resilient, evidenced by strong Visa and Mastercard earnings [00:15:25]. This suggests that sentiment often acts as a lagging indicator, improving as market conditions rebound [00:16:11].
Political Overlay on Fed Decisions
There is a hypothesis that the Fed’s decisions are increasingly politically motivated, beyond just financial metrics. The Fed’s press release, heavily using variations of “waiting,” might indicate a deliberate delay in cutting rates. This delay could be interpreted as Chairman Powell holding back this economic lever, potentially to avoid benefiting Trump, given their previous tensions [00:18:08].
While some liquidity measures, such as subprime lending spreads, are showing “blinking yellow lights” that historically portend a liquidity crisis, the Fed is seemingly choosing to ignore these indicators [00:19:04]. This suggests a political motivation to avoid a rate cut that could be seen as advantageous for the current administration [00:19:18].
Tariffs and Their Economic Implications
The Fed’s caution is also linked to the impact of tariffs. For example, a new trade deal with the UK includes a 10% tariff rate for UK imports into the US, even for a friendly ally [00:21:29]. If this 10% tariff becomes a standard in future trade deals, it could generate a significant long-term revenue stream for the federal government, potentially allowing for tax cuts [00:22:26]. Such revenue could influence the Fed’s calculus on rate cuts by driving inflation, GDP growth, and employment [00:22:47].
However, the full impact of tariffs is debated. One retailer indicated that only about 50% of tariffs are passed through in pricing, suggesting a less direct impact on consumer costs than some assume [00:23:30]. Despite initial concerns, the market reacted positively to the UK trade deal, indicating a potential shift towards more mutually beneficial trade agreements [00:23:55]. Additionally, the elimination of a 2% tax on big tech companies in the UK deal and a significant Boeing order from a foreign entity are expected to further drive GDP and employment [00:24:40].
It is difficult for the Fed to cut rates in an environment where GDP and employment are expected to grow, and inflation could be impacted by new trade policies [00:25:00]. A sustained period of 4-5% interest rates would have significant implications for the economy [00:25:17].
Tariffs and the Tech Market
The imposition of tariffs, particularly sector-specific ones on semiconductors and computer assembly, has been disruptive for the tech industry [00:27:09]. This uncertainty initially caused the market to drop significantly. However, a “feedback loop” has emerged where executives can now present their cases in Washington, allowing for adjustments to policy [00:27:50].
The rise of AI and its associated “tokens” (computational units) is seen as a more significant market driver than tariffs. Microsoft’s report of processing 100 trillion tokens, with 50 trillion in March alone, indicates a “vertical” growth in AI usage, leading to a shortage of chips and compute power [00:29:04]. This technological advancement is creating a “once-in-a-generational opportunity” for companies across the economy, as traditional businesses are reinvented using AI [00:31:27].
Some argue that the excitement around AI and its potential for “American exceptionalism” is overshadowing the concerns about tariffs, suggesting that tariffs may eventually fade as a primary concern [00:30:10].
Market Predictions
- Poly Market indicated an 84% chance of no change in Fed rates for June, 51% for July, and a 48% chance of a cut by September [00:16:34].