Two Reasons Why Interest Rates Won’t Fall Anytime Soon
If you’ve been seriously waiting for interest rates to fall, I have some bad news: The Federal Reserve has effectively paused rate cuts until President Donald Trump and Congress set a clear policy direction that won’t cause inflation to get even worse. According to minutes from the Federal Reserve’s January meeting released this week, the cautious stance is a result of the Fed simply not knowing how the “economic consequences of potential government policies” might play out.
While the federal funds rate is designed to set what banks charge each other, it applies to everything from mortgages to student loans. If you’re planning to apply for a credit card, home or car loan soon, here’s how the Fed’s waiting game will affect you.
High inflation is still a problem
Assuming there won’t be a sudden jump in the unemployment rate, Fed officials said they “would like to see further progress in inflation before making further adjustments to the target range for the federal funds rate.” Meanwhile, inflation proved more resilient than expected, with January figures coming in higher than expected .
While no rate move in either direction is the most likely outcome for now, there is a chance that if inflation worsens again, the Fed’s next move will be to raise rates rather than cut them.
Market expectations for interest rate cuts have already dropped significantly. The latest CNBC Fed poll found that 65% of respondents forecast two rate cuts in 2025, up from 78% in the previous survey. And if the Fed does cut rates this year, the first cut may not come until June or July, according to CME’s FedWatch tool . In other words, the Fed has adopted a “wait and see” attitude—it is unwilling to cut rates amid uncertainty about the new administration’s economic policies.
Trump’s tariff plans could raise prices even more
The biggest contributor to this economic uncertainty comes from President Trump’s announced plans to impose tariffs on imports. While previously announced tariffs on Canada and Mexico are suspended (at least for now ), China faces new 10% tariffs , and additional tariffs on these and other countries are not a possibility.
The Peterson Institute estimates that tariffs on China, Mexico and Canada alone could cost the average American household about $1,200 a year—and that estimate doesn’t take into account Trump’s broader reciprocal tariff plans. This is because when tariffs increase the cost of an imported product, those costs are passed on to the buyer.
Larger purchases such as cars, appliances and electronics are likely to see the most noticeable price increases, Johnston said. These products often rely heavily on global supply chains and imported components. Even products assembled in the United States often rely on imported components, meaning tariffs can affect prices even for “American-made” products.
Bottom line
If you were hoping that interest rates might drop in the next few months, don’t hold your breath . We’ve been battling persistent inflation for years, and with inflationary pressures from tariffs on the horizon, the Fed appears committed to keeping rates higher until there is compelling evidence that inflation is well under control.
But hey, while higher interest rates increase costs for borrowers, they can also mean higher returns for savers—so here’s how you can take advantage of it .