The economic expansion finds itself surrounded by worried onlookers. Growth has stalled, risks are rising, and policymakers are debating their next move. The Trump administration’s executive orders to increase tariffs threaten to act as a fresh shock to an already vulnerable system. While some market voices are calling for prompt interest rate cuts to help cushion the economy, the Federal Reserve appears inclined to stay patient for now.
The next meeting of the Federal Open Market Committee (FOMC) is scheduled for May 6–7. As of this writing, market expectations, as reflected by the CME FedWatch Tool, suggest a high probability—around 95%—that the Fed will keep the federal funds rate unchanged at its current range of 4.25% to 4.50%. The Fed has emphasized its commitment to a data-dependent approach, and any potential adjustment to policy will reflect the evolving economic picture. At the same time—as we noted in our recent webinar—they recognize that uncertainty around economic projections is much higher than it was several months ago.
While traders have recently pared back expectations for aggressive rate cuts, they still see a potential resumption of easing in June. Federal Reserve officials, however, have signaled they want more consistent evidence that inflation is trending sustainably toward the Fed’s 2% target before easing further. (This raises a fair question: given that the data have been trending lower for months, is the Fed now targeting 2% or insisting on seeing it first before acting?) Many economists suggest that the inflationary impact of tariffs may be transitory—a short-lived “Trump Bump” rather than a structural threat to price stability. Policymakers are also closely monitoring the labor market for any signs of softening that could warrant a shift.
What is the most recent economic data saying?
The U.S. economy contracted at an annualized rate of -0.3% in the first quarter of 2025, marking the first quarterly decline since early 2022. This downturn was primarily driven by a record 41.3% surge in imports as businesses rushed to stockpile goods ahead of new tariffs introduced under President Trump’s “Liberation Day” trade policy. The resulting trade deficit subtracted a record 4.83 percentage points from GDP. While consumer spending grew at a modest +1.8% and business investment increased, much of this activity likely reflected front-loading behavior in anticipation of higher costs, raising concerns about the sustainability of domestic demand in the coming quarters.
The composition of GDP growth weakened. Imports have surged, inventories have built up, and federal government spending has slowed, all of which are expected to drag on growth in the coming quarters too. Looking ahead, without a quick resolution to the emerging trade conflicts, exports, inventories, and consumer activity all could be vulnerable. Companies facing higher input costs and supply chain disruptions may soon pull back on hiring, capital spending, and discretionary expenses.
The labor market, for now, still looks solid. Weekly jobless claims remain low, and businesses that struggled to find workers over the past several years have been slow to lay off employees. However, cracks are beginning to form beneath the surface. Business confidence indicators have softened, and if employers lose confidence in the near-term outlook, a sharper slowdown in hiring could follow.
Inflation, similarly, appears contained for now. Measures like the Core PCE price index are running near the Federal Reserve’s 2% target. Year-over-year compensation growth has moderated, and long-term inflation expectations remain anchored. However, the second half of 2025 could tell a different story. As tariffs ripple through supply chains and the recent decline in the U.S. dollar feeds into higher import prices, headline inflation could rise — even as growth slows. It remains to be seen if consumers—resilient, but still smarting from Covid-era inflation—will tolerate higher prices if tariffs are passed on to them.
In short, today’s data still provides a veneer of stability. But under the surface, the risks of a more serious slowdown are mounting.
The case for action – and some counterpoints
Against this backdrop, some respected independent voices are making the case for the Fed to act sooner rather than later. Jeremy Siegel, Senior Economist at WisdomTree and Professor Emeritus at the Wharton School, recently outlined a compelling argument for rate cuts — not as a political concession, but as a move grounded firmly in economic evidence.
Siegel’s case rests on several key pillars:
- Liquidity is tightening.
Historically, healthy U.S. expansions have been accompanied by money supply growth of 5%–6% annually. Today, growth has fallen below 4%, starving the economy of liquidity. Without easier monetary conditions, the risk of a demand-driven recession may continue to rise.
Counterpoint: M2 money supply expanded dramatically during the pandemic, and today’s slower pace may reflect a healthy mean reversion rather than a sign of economic distress. - Inflation expectations remain well-anchored.
Despite the likelihood of a short-term “Trump bump” in prices, long-term inflation expectations — as measured by the 5-year, 5-year forward inflation rate — sit at roughly 2.3%, in line with the Fed’s long-term target. Markets are not currently pricing in a loss of inflation control.
Counterpoint: While market-based inflation gauges remain stable, some independent forecasters and consumer sentiment surveys suggest expectations are creeping higher—especially among households still wary after the inflation shocks of 2021–2022. - The yield curve is (slightly) inverted.
In normal economic periods, the Fed Funds rate typically sits about 100 basis points below the 10-year Treasury yield. Today, short-term rates are above long-term ones — an inversion that historically has been a reliable indicator of heightened recession risks.
Counterpoint: Some analysts argue that global demand for long-duration Treasurys and the Fed’s large balance sheet may be distorting the yield curve, weakening its signal as a forward-looking indicator.
Siegel also noted a longer-term institutional risk: if the Fed hesitates to ease despite mounting evidence and a recession follows, political pressure could intensify and the Fed’s independence could be called into question. Acting thoughtfully now — based on data, not political pressure — would demonstrate the Fed’s commitment to being proactive and evidence-driven.
It is also worth noting that the situation surrounding tariffs remains fluid. Ongoing negotiations with major trade partners could eventually result in a reduction or elimination of some tariffs. The Fed retains flexibility: it could lower rates now to cushion against near-term risks and, if trade tensions ease meaningfully later this year, recalibrate policy by raising rates back toward neutral levels if needed. Early action would not foreclose future options — it would help stabilize the economy while keeping monetary policy responsive to evolving conditions. At the same time, some observers note that markets are increasingly reactive to Fed language, while the Fed remains cautious not to appear beholden to market expectations. This delicate dance complicates communication around future policy pivots.
Of course, inflation risks cannot be ignored. Wage growth remains elevated in some areas, and supply chains could yet introduce unexpected price pressures. However, given the moderating trends in broader inflation measures and the emerging signs of economic fragility, there is a credible case that a measured rate cut would better balance the Fed’s dual mandate: supporting both price stability and maximum employment.
While monetary policy adjustments may eventually provide support, market volatility is likely to persist in the near term as the economy navigates these crosscurrents. Areas of the market with stretched valuations or tight credit spreads remain particularly vulnerable. A focus on quality, diversification, and risk management remains critical. At Withum Wealth, we are carefully monitoring developments in monetary and fiscal policy as well as underlying corporate fundamentals.
Ultimately, monetary policy is most effective when it is proactive, not reactive. While the timing and extent of any future moves remain uncertain, the evidence suggests that the case for easing is gaining traction — even if not yet broadly embraced. Should the Fed act in the months ahead, it need not represent political acquiescence — but rather a measured response to a complex and rapidly evolving economic landscape. The Fed should demonstrate that it can be both data dependent and anticipatory—responding not only to what the economy has done, but to what the data suggest may lie ahead.
