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Trump administration keeps up pressure on Fed, but investors don’t expect the US central bank to cut short-term rates until September as policymakers weigh tariff impacts
Inflation continued to move closer to the Federal Reserve’s 2 percent target in April, but central bank policymakers are expected to resist calls by the Trump administration to cut interest rates as they continue to assess the impacts of the administration’s policies in areas including tariffs, immigration, taxes and regulation.
The personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred gauge of inflation, showed the price of goods and services rose 2.1 percent in April from a year ago, the Bureau of Economic Analysis reported Friday.
View Interactive Graph of PCE Index Year Over Year
View Interactive Graph of Disposable Income And Consumption Expenditures Year Over Year
It was the second month in a row that the annual increase in the PCE price index moved in the right direction. The core PCE price index, which excludes volatile food and energy costs and is seen as a better indicator of inflation trends, showed costs were up 2.5 percent from a year ago — the lowest reading in 4 years.
Inflation moving toward Fed’s goal
View Interactive Graph
Before the latest inflation numbers were released, Federal Housing Finance Agency Director Bill Pulte urged Fed policymakers to cut rates when they meet next on June 17.
“First and foremost, inflation is lower than it was the last time they cut,” Pulte said Thursday in an appearance on Bloomberg’s The Close. “President Trump has been very successful at reducing inflation, and so therefore it just only makes sense that if inflation was higher and they did cuts, then why can’t they do cuts now?”
While the Fed has tight control over short-term interest rates, mortgage rates are largely determined by investor demand for mortgage-backed securities (MBS), the ultimate source of funding for most home loans.
As the Fed cut short-term interest rates by a full percentage point at the end of last year, mortgage rates moved in the other direction, as economic data coming in last fall showed inflation moving away from the Federal Reserve’s 2 percent target.
But Trump himself remains fixated on the Fed, calling Federal Reserve Chair Jerome Powell “a FOOL, who doesn’t have a clue” in a May 8 Truth Social post after Fed policymakers voted unanimously to keep the short-term federal funds rate at 4.25 percent to 4.5 percent.
At a press conference following the meeting, Powell said the job market remains “solid,” but tariffs implemented and threatened by the Trump administration could reignite inflation. “The new administration is in the process of implementing substantial policy changes in four distinct areas: trade, immigration, fiscal policy and regulation.”
Tariff increases announced so far have been “significantly larger than anticipated,” the Fed chair said, and if implemented, “are likely to generate a rise in inflation, a slowdown in economic growth, and an increase in unemployment.”
Forecasters at Pantheon Macroeconomics are seeing early signs that tariffs are having an impact on prices, with core PCE inflation up 0.3 percent from March to April, Pantheon Senior U.S. Economist Oliver Allen said in a note to clients Friday.
“Much bigger increases in core goods inflation probably loom as the costs of the new tariffs are eventually passed on,” Allen said. “Accordingly, we still think core PCE inflation will peak later this year between 3 percent and 3.5 percent, if the current mix of tariffs remains in place.”
The CME FedWatch tool, which tracks futures markets to predict the probability of future Fed moves, shows investors don’t expect the Fed to cut short-term rates until September. But bets placed by investors on Friday indicate a 72 percent chance of a September rate cut, up from 66 percent on Thursday and 60 percent on May 23.
When the European Central Bank continued to cut rates in April while the Federal Reserve continued to take a wait-and-see stance, Trump complained that Powell “is always TOO LATE AND WRONG” and said his “termination cannot come fast enough!”
In a May 22 order, the Supreme Court made it clear that Trump can’t fire Powell without cause — the constitutionality of for-cause removal protections for members of the Federal Reserve’s Board of Governors are not in dispute.
Powell met with Trump at the White House Thursday “to discuss economic developments” including growth, employment and inflation, the Fed disclosed after the meeting.
“Chair Powell did not discuss his expectations for monetary policy, except to stress that the path of policy will depend entirely on incoming economic information and what that means for the outlook,” the Fed said in a statement. Fed policymakers will base their decisions “solely on careful, objective, and non-political analysis.”
Mortgage rates on the rebound
View Interactive Graph
Since hitting a 2025 low of 6.48 percent on April 4, rates on 30-year fixed-rate conforming mortgages have been trending back up and flirting with January highs, according to lender data tracked by Optimal Blue.
A weekly survey of lenders by the Mortgage Bankers Association shows demand for mortgages has slipped in recent weeks, but is stronger than it was a year ago.
Thanks to more homes coming onto the market, applications for purchase loans were up by a seasonally adjusted 3 percent last week compared to the week before, and 18 percent higher than a year ago, MBA Deputy Chief Economist Joel Kan said.
With mortgage rates returning to the highest level since January, applications to refinance were down 7 percent week over week, but up 37 percent from a year ago.
“Purchase applications were up over the week and continue to run ahead of last year’s pace as increased housing inventory in many markets has been supporting some transaction volume, despite the economic uncertainty,” Kan said in a statement.
Source: Mortgage Bankers Association’s Weekly Mortgage Applications Survey.
After hitting a 2025 high of 172.7 during the week ending April 4 as mortgage rates were touching lows for the year, the MBA’s seasonally adjusted purchase index retreated to 146.6 during the week ending April 25.
At 162.1 during the week ending May 23, the MBA purchase index is up 28 percent from its 2025 low of 127.7 registered during the first week in January.
While the potential for tariffs to reignite inflation is an immediate concern for investors that has helped drive up mortgage rates, the potential for tax cuts proposed in Trump’s “big beautiful bill” to drive up federal debt is also on their long-term horizon.
On May 16, Moody’s Ratings became the last of the big rating agencies to downgrade the U.S.’s credit rating, over concerns that “successive U.S. administrations” and Congress have failed to tackle the nation’s annual budget deficits and growing interest costs.
CBO projects record government debt by 2029
Projected federal debt as a percentage of GDP. Source: “The Long-Term Budget Outlook: 2025 to 2055,” Congressional Budget Office.
The Congressional Budget Office in March projected that federal debt as a percentage of gross domestic product (GDP) will hit record levels in 2029 and continue to rise.
Trump has complained that dire projections of how extending tax cuts granted by the 2017 Tax Cuts and Jobs Act will impact deficits underestimates the boost in revenue the federal government might see if the U.S. economy grows at a faster clip.
Trump revisited that debate on Friday, calling growth projections by the Congressional Budget Office “ridiculous and unpatriotic.”
Trump advisor Peter Navarro provided more insight into Trump’s thinking Wednesday in an opinion piece for The Hill.
Navarro said that investor demands for higher yields on 10-year Treasurys — a key barometer for mortgage rates — “reflects fear, not facts.”
Bond investors, he said, “are pricing in a future where the government borrows trillions more with no offsetting revenues. They believe the tax cuts are not paid for.”
But Navarro claimed, “Trumpnomics and the Trump tariffs will put America on a sounder fiscal footing than any policy proposal in decades. That’s the complete information our financial markets should be working from – and bond investors should yield to that wisdom.”
Yields on 10-year Treasurys were essentially unchanged Friday at 4.41 percent, despite the encouraging April inflation numbers.