Could tariffs force Fed to put brakes on rate cuts for the rest of 2025?
The political pressure directed at the Federal Reserve and its Chair, Jerome Powell, from the Trump administration has been intense and relentless. The directive is to cut rates dramatically. However, one economist warns that a massive slash in rates could be disastrous.
Chen Zhao (pictured top), head of economic research with Redfin, said pressuring the Federal Reserve to cut rates excessively could cause significant inflation. That could cause the Fed to have to raise rates to keep inflation in check.
“If the Fed funds rate is not as restrictive as it needs to be, the main danger is that inflation gets out of control,” Zhao told Mortgage Professional America. “Once inflation is out of control, it becomes very difficult to tame it without hiking interest rates up very high. This is what happened in the 1980s.”
According to Bankrate, which began aggregating interest rate data in 1982 and collected it from Freddie Mac before then, the highest average 30-year mortgage rate in the 1980s was in 1982 at 16.64%. Average yearly rates in the 80s ranged from 10.25% to 16.64%.
Powell has been under fire for not lowering the central bank’s interest rate and has been accused of excessive spending on building renovations. President Trump continued his criticism on Monday, saying the Fed should lower rates below 1%.
Zhao believes it is a balancing act for the Fed to keep all economic indicators in line.
“I think the Fed is strongly committed to doing the best job they can in terms of balancing inflation risk with recession risk in the face of volatile economic policy,” Zhao said.
Firing Powell might not lower rates
While Powell remains in the headlines as the target of the administration’s ire, he does not decide on rate decisions alone. He is just one member of the 12-member Federal Open Market Committee (FOMC).
“The Fed Chair is one of 12 people who vote on the FOMC on monetary policy decisions,” Zhao said. “Generally, the Chair is on the majority side and there are few dissents. However, that need not be the case.”
Lawrence Yun, chief economist at National Association of Realtors (NAR), believes the Federal Reserve is too focused on tariffs and not enough on other disinflationary factors. He urges the Fed to widen its view for earlier rate cuts. https://t.co/IcIyoRhjqA
— Mortgage Professional America Magazine (@MPAMagazineUS) June 17, 2025
Zhao said if the FOMC believes that a member, even the Chair, is being influenced politically to make a rate move that doesn’t make sense to the overall committee, they can be overruled.
“If the rest of the FOMC believes that the Chair is bowing to political pressure, they can vote against him,” she said. “Realistically, at any given time, it’s reasonable to argue that the Fed Funds rate should be 25 to 50 basis points higher or lower. But if the Chair is saying that it should be 100 bps lower, that would likely be viewed as politically biased, and the rest of the Committee may vote against him.”
New tariffs, new uncertainty
Trump announced a new round of tariff threats, which are scheduled to go into effect on August 1. While trade deal negotiations continue, the deadline is two days after the central bank announces its latest rate decision. CME FedWatch gives a 95.3% chance of no rate change.
Most prediction sites like FedWatch still believe the Fed will cut rates two more times in 2025. However, Zhao notes that if trade deals aren’t completed and tariffs go into effect, that may change.
“The market is still expecting 1-2 cuts toward the end of 2025,” Zhao said. “However, the more tariff policy volatility there is, the more likely it is that there are fewer or no cuts. The reason is that the more tariff policy changes, the more likely it is that, in the Fed’s view, inflation expectations become “unanchored”. Meaning that rather than a one-time price increase, consumers start expecting that there are a series of price increases.
“That can become a self-fulfilling prophecy that keeps inflation higher for longer. A one-time inflation increase can be ignored by the Fed, but a prolonged increase is one that they would need to address through more restrictive monetary policy, like higher rates.”
Zhao said that while a decrease in the interest rate could help the housing market, high rates are not the only factor causing issues. She believes the Fed has to keep the entire economic picture in mind when considering a rate move to avoid long-term problems.
“A drop in rates would certainly spur housing market activity,” she said. “However, the housing market has some deeper issues related to a shortage of housing units. At the end of the day, the prevailing rate has to make sense in the context of broader economic growth, inflation, and labor market activity. Artificially low rates will only create greater problems down the road.”
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