The Fed Could Be on Hold Until September, Economists Say

More than 20 times during a roughly 45 minute news conference on Wednesday, Jerome H. Powell, the chair of the Federal Reserve, referenced the idea of waiting to see how President Trump’s policies would ripple through the economy before taking any action on interest rates.

Mr. Powell, who spoke after the Fed opted to extend a pause on interest rate cuts, said the central bank had the flexibility to do so because the economy overall was still on solid footing. He also stressed that it was the most prudent decision at a time when there was so much uncertainty about how much tariffs would raise inflation and slow growth.

“It’s really not at all clear what it is we should do,” he told reporters.

Forecasts for when the Fed will restart interest rate cuts have been in a constant state of flux, whipsawing on every twist and turn in the global trade war or on any new data point that sheds a sliver more light on the state of the economy. But what is starting to set in is that the Fed may in fact be on hold for quite a bit longer than initially expected — and far longer than Mr. Trump would like. The president on Thursday again pressed Mr. Powell to lower interest rates, calling him a “fool.”

Economists are increasingly coalescing around September as the most plausible time for the Fed to restart interest rate cuts. Some have penciled in an even later start date. The longer the Fed waits, the higher the odds that officials may have to lower borrowing costs more aggressively to shore up the economy.

“The likelihood of them moving doesn’t really start to increase until you get to the September meeting,” said Tiffany Wilding, an economist at asset manager Pimco. She said a larger-than-usual half-point cut would be firmly on the table at that point and that she expects the Fed to keep lowering rates into the next year.

“I don’t think that using the playbook of 25 basis point increments per meeting for cuts is the right one to use here,” Ms. Wilding said, pointing to the possibility that the economy could weaken abruptly.

Mr. Powell on Wednesday was clear that the current backdrop was not one in which the Fed could be pre-emptive with interest rate cuts — unlike during Mr. Trump’s first-term trade war when inflation was subdued and the economy was at risk of stagnating.

That is primarily because inflation has been running above the central bank’s 2 percent target for four years, but also “because we actually don’t know what the right response to the data will be until we see more data,” Mr. Powell said.

What that means in practice is that the Fed will need to have concrete evidence in hand that the economy is languishing before feeling confident that it can lower interest rates without having to worry about stoking inflation. That could take time to show up.

“In their view, they can’t really make policy on the basis of a forecast,” said Dean Maki, chief economist for Point72, a hedge fund. “Right now, there is just too much uncertainty about where policy is going to go, about how that policy is going to ripple through the economy and about what the timing of that is.”

So far, the data the Fed has points to low layoffs and an overall solid labor market. Spending has slowed but not stalled completely. The question is how long that lasts if consumers have already turned much more downbeat about the outlook, and businesses are seeing early signs of sluggish sales and have begun to retrench.

Mr. Maki is still forecasting a July cut, but said he could envision the Fed pushing that back to September if there are not yet “significant signs” that the labor market is deteriorating. That would include rising unemployment claims and a couple of soft monthly jobs reports.

Traders in federal funds futures markets are still holding out some hope for a downshift in borrowing costs in July, after scaling back their bets for a June move on Wednesday. But there are reasons to think that the data will not have turned decisively enough in time for that.

The Trump administration is working against a July 9 deadline to mint trade deals with countries after pausing more onerous tariffs initially announced in April. On Thursday, it is set to announce its first agreement with the United Kingdom.

Top officials will also meet with their counterparts in China in Geneva, Switzerland this weekend to work toward a deal to reduce the minimum 145 percent tariffs Mr. Trump put in place on imports from the country.

White House officials are also wrangling with lawmakers to pull together a multi-trillion-dollar tax cut package by July 4.

With trade policy particularly fluid, Christopher J. Waller, a Fed governor, acknowledged last month that it was unlikely that “anything dramatic” would happen in the economic data before there was more clarity on that front.

“I don’t think you’re going to see enough happen in the real data in the next couple of months, until you get past July,” he said. The Fed will have only two more job reports in hand by the time it meets at the end of that month in addition to three inflation reports.

Much will depend on how significantly tariffs, which are a tax on imports, stoke inflation. If protectionism leads to persistently higher prices, that would have much more far-reaching consequences for the economy than a one-off spike. A lot will also depend on how consumers respond to the increase.

Ms. Wilding expects the pop in inflation from tariffs to come before any notable rise in the unemployment rate. One theory is that higher prices will cause consumers to cut back on spending, further weighing on companies’ already-strained margins. Layoffs may follow if the downshift is big enough, but they may not be the first way in which businesses try to reduce costs given the acute labor shortages most faced in the aftermath of the pandemic.

Michael Feroli, the chief economist at JPMorgan, expects the labor market to weaken enough by late summer to prompt the Fed to cut in September. Kathy Bostjancic, the chief economist at Nationwide, has also penciled in a cut then, but thinks the Fed will have to go big with a half-point reduction.

Other economists see the Fed on hold for even longer. Deutsche Bank’s team has the first cut coming in December. Larry Meyer, a former Fed governor who is now an economist at research firm LHMeyer, expects no rate cuts until 2026.

“The first thing the Fed has to do is contain inflation expectations in word or deed,” he said. “I think that means not easing this year.”

Market-based measures of inflation expectations, to which the Fed pays closest attention, suggest that inflation will indeed remain contained after jumping this year. Survey-based gauges paint a more worrying picture, a divergence that some economists say is a sign that expectations about future inflation are not as under control as officials would like.

Mr. Powell on Wednesday said there was “no cost” to the Fed waiting for now to make a policy move. The central bank was “well positioned to respond in a timely way to potential economic developments,” he said, suggesting the central bank would quickly adjust course if the circumstances changed. If the Fed saw a “significant deterioration,” Mr. Powell said, in the labor market, it would “look to be able to support that.”

He added one caveat, however: “You’d hope it wasn’t also coming at a time when inflation was getting very bad.”