At the recent European Central Bank forum, Federal Reserve Chair Jerome Powell offered rare insight into the current state of U.S. interest rate policy — and the complicated balancing act the Fed is navigating. According to Powell, if not for the Biden administration’s recent decision to impose new tariffs, the Fed might have already resumed its rate-cutting cycle.

Back in early April, when President Trump announced a sweeping new round of tariffs, financial markets responded sharply. U.S. stocks swung wildly, bond yields surged, the dollar weakened, and many companies paused investment plans — all pointing to increased downside risks for the broader economy. Faced with this new wave of uncertainty, the Fed decided to hold steady on interest rates. Making any premature moves, Powell explained, could amplify volatility and further cloud the economic outlook.

In truth, the Fed had already started lowering rates late last year. But Powell acknowledged that the scope and unexpected economic impact of the tariff measures were far more significant than originally forecasted. Inflation projections jumped across the board, prompting the central bank to hit pause and wait for clearer data before proceeding any further.

He emphasized this is not an overreaction to short-term inflation spikes, but rather a cautious response to a rapidly shifting economic landscape. In essence, the central bank is doing what it does best — staying data-dependent and avoiding knee-jerk decisions in the face of incomplete information.

The bond market still expects the Fed to restart rate cuts sometime later this year. According to the Fed’s latest dot plot, two rate reductions — each by 25 basis points — are anticipated in 2025, likely around the September and December policy meetings. Another cut may come in 2026, aligning with Powell’s broader stance: in a highly uncertain environment, it’s better to act carefully than to risk oversteering the economy.

One notable moment at the forum came not from what Powell said, but from what he didn’t. Despite repeated criticism from former President Trump — accusing the Fed of being too slow and too passive in cutting rates — Powell avoided engaging with any of those remarks. He stood by the Fed’s independence and reiterated that the smartest thing policymakers can do right now is “wait and see,” letting economic data rather than political pressure drive decisions.

Looking ahead, analysts generally agree that tariff-related inflation will likely peak in the short term. But as economic growth continues to cool, the broader trend toward lower interest rates is expected to resume. By the end of 2027, most forecasts suggest the federal funds rate could settle between 2.25% and 2.5%, with long-term Treasury yields gradually declining as well.

For investors, all eyes are now on the upcoming Fed policy meeting at the end of the month. Markets will be watching closely for any signs of a shift in tone — or timing — as policymakers reassess their next move in a climate that remains anything but predictable.