US Fed unlikely to shift policy this summer despite easing inflation

NEW YORK / ISTANBUL

Despite lower-than-expected US inflation in May, analysts say the Federal Reserve is unlikely to cut interest rates before December as it monitors the impact of tariffs and evaluates future price trends.

Data released this week showed annual consumer inflation eased for the 4th straight month. The Consumer Price Index (CPI) rose 0.1% in May, or 2.4% year-on-year — below market expectations. Meanwhile, nonfarm payrolls increased by 139,000 and the unemployment rate held steady at 4.2%.

Still, money market pricing suggests the Fed will keep its policy rate unchanged at 4.25–4.50% at its upcoming meeting, with the first rate cut expected no earlier than September.

Analysts: Fed will stay cautious amid tariff risks

“The Fed is going to be reactionary and they will want to see how inflation does this summer when the tariffs will be hitting inflation harder,” said Ryan Sweet, chief US economist at Oxford Economics.

Sweet said the May CPI reflected the disinflationary effects of earlier tariffs, including declines in gasoline, airline tickets and public transport costs. However, he warned that car inventories are shrinking and that may push vehicle prices higher in the coming months.

“Less inventory also foreshadows higher vehicle prices,” he said, noting that tariff-driven demand contractions were also visible in the lodging and travel categories.

Steven Kamin, senior fellow at the American Enterprise Institute, agreed that recent CPI data was encouraging, showing inflation trending toward the Fed’s 2 percent target. But he also pointed to lingering uncertainty over tariffs and a still-resilient labor market.

“Therefore, assuming that the effect of tariffs going forward is limited, I would expect the Fed to cut rates once or twice much later in the year,” he said.

Garvey: inflation could rebound in coming months

Padhraic Garvey, ING’s Americas Regional Head of Research, warned against premature optimism.

“We will have self-inflicted inflation issues in coming months,” Garvey said, adding that expected cost increases from higher tariffs were described as “strong, significant or substantial” in the Fed’s latest Beige Book.

While markets welcomed the CPI data, Garvey said July and August inflation readings could be stronger, especially in sectors vulnerable to cost pass-throughs such as clothing and autos.

Trump renews calls for full-point rate cut

US President Donald Trump repeated calls this week for the Fed to cut rates by a full percentage point, describing the May CPI reading as “great.”

“Fed should lower, one full point. Would pay much less interest on debt coming due. So important,” Trump said in a post following the inflation report.

Trump has long accused Fed Chair Jerome Powell of reacting too slowly to economic signals, particularly in the face of global rate-cutting trends.

No move expected until year-end

Despite political pressure, most analysts say the central bank is unlikely to shift policy soon.

Sweet said the Fed would likely stay on hold through summer: “The incoming data doesn’t appreciably increase the odds that the central bank cuts rates before December, which is our baseline.”

While easing inflation is encouraging, the Fed’s cautious stance reflects a broader concern — that premature cuts could fuel fresh price pressures or undercut credibility in managing inflation expectations.