Global Uncertainty Freezes Fed: No Rate Cut Expected Amid Geopolitical And Trade Risks

The US Federal Reserve is expected to maintain its current interest rates when it announces its decision on Wednesday. Policymakers are closely monitoring growing geopolitical tensions and the potential for inflationary pressures stemming from both the ongoing Middle East conflict and newly imposed US trade tariffs.

The conflict between Israel and Iran showed no signs of easing on Wednesday, marking its sixth consecutive day of missile exchanges, reported Reuters. President Donald Trump hinted at possible American involvement, while Iran's Supreme Leader Ayatollah Ali Khamenei issued a stern warning against US intervention.

Although the violence has escalated, its immediate effect on oil markets has been limited. Oil prices have increased roughly 10 per cent to $77 per barrel, significantly lower than the $120 levels seen after Russia’s invasion of Ukraine in 2022, which triggered widespread disruptions across global commodity markets.

However, analysts caution that risks remain. According to Goldman Sachs, while oil prices are expected to stabilise in the near term, “in extreme tail scenarios where regional oil production or shipping ... is disrupted for an extended period," prices could surge beyond $100 per barrel. The 1970s oil shocks serve as a historical reminder of how energy disruptions can drive inflation.

Even though the US is now a net oil exporter, a sustained global price shock could introduce considerable uncertainty for Federal Reserve policymakers.

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Cooling Economy Adds Complexity to Fed's Rate Decision

Since setting the federal funds rate between 4.25 per cent and 4.50 per cent in December, the Federal Reserve has faced an increasingly uncertain economic landscape. President Donald Trump’s return to office in January and his swift implementation of higher import tariffs have added to inflationary concerns. While many of the new tariffs have been delayed, unresolved trade disputes remain a significant worry for Fed officials.

Simultaneously, indicators suggest that economic momentum may be softening. Although jobless claims declined in the past week, suggesting that companies are hesitant to lay off workers, overall job creation has been slowing. The housing market has also shown signs of weakness, with housing starts plummeting nearly 10 per cent in May to levels not seen since the early months of the 2020 pandemic. Additionally, building permits dropped by 2 per cent, indicating continued sluggishness in future housing supply.

This uncertain economic backdrop leaves Fed officials cautious about making any definitive moves. A National Association for Business Economics survey released on Monday reflected growing concern about stagflation. The survey projected US GDP growth will slow to 1.3 per cent in 2025, down from earlier forecasts of 1.9 per cent, while inflation is expected to end the year at 3.1 per cent—significantly higher than the Fed’s 2 per cent target. The unemployment rate, currently at 4.2 per cent, is predicted to rise gradually to 4.7 per cent by early 2026.

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Fed Likely to Wait for Clearer Economic Signals

With risks on both sides of its mandate—balancing inflation control with employment stability—the Federal Reserve is likely to take a cautious stance in the months ahead. Despite President Trump’s calls for immediate rate cuts, investors generally anticipate the Fed will hold steady at least until September. The central bank already cut rates three times in 2024.

“The Fed's revealed preference is to be paralysed by Trump's uncertainty. Central bankers are always a conservative bunch, and with risks to both sides of their mandate, the bias is to wait and see if the next few months will resolve their dilemma. Meanwhile, the president ain't happy," the news agency noted quoting Dario Perkins, an economist at TS Lombard, in his analysis.

The Fed’s policy statement, along with updated economic and interest rate projections, will be released at 11:30 PM (1800 GMT), followed by a press conference by Fed Chair Jerome Powell.

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