It was an encouraging week for economic data, with inflation showing signs of moderation and consumer sentiment rebounding for the first time this year. The labor market remains broadly stable, with the unemployment rate holding at a healthy 4.2%, although a recent uptick in continuing jobless claims suggests some signs of cooling.
Altogether, the backdrop appears supportive of the Federal Reserve’s path toward easing. But Wall Street watchers say policymakers may need more convincing before delivering any cuts.
Read more: How the Fed rate decision affects your bank accounts, loans, credit cards, and investments
“We don’t know really how the second half of the year is going to play out,” Loretta Mester, former Cleveland Fed president, told Yahoo Finance on Thursday.
Mester added that although the “hard” economic data, like the recent labor and inflation reports, have been encouraging, “the real question is what is going to happen in the second half of the year and [if] those trends continue. That’s where the high level of uncertainty still is with us.”
US Federal Reserve Chair Jerome Powell speaks during a conference marking the 75th anniversary of the International Finance Division of the Federal Reserve Board in Washington, DC, on June 2, 2025. (Photo by ANDREW CABALLERO-REYNOLDS / AFP) (Photo by ANDREW CABALLERO-REYNOLDS/AFP via Getty Images) ·ANDREW CABALLERO-REYNOLDS via Getty Images
The uncertainty centers on the scope and scale of President Trump’s tariffs in the aftermath of his April “Liberation Day” announcements, which sent shockwaves through markets and businesses.
Since then, many of those “reciprocal” tariffs have been paused, but the 10% baseline duties for most countries remain in place. The president is set to notify US trading partners of their respective unilateral tariff rates in the coming weeks.
Read more: The latest news and updates on Trump’s tariffs
In the meantime, Mexico and Canada continue to face fentanyl-related tariffs, and industry-specific tariffs on steel, aluminum, and autos remain unchanged.
Earlier this week, the US and China agreed to a framework and implementation plan aimed at easing tariff and trade tensions. President Trump signaled his approval, saying the deal was “done,” pending final sign-off from him and Chinese President Xi Jinping. As part of the agreement, Trump said the US would impose a total of 55% tariffs on Chinese goods.
Many market observers said the deal was sparse on details. Outside analysts like the budget lab at Yale have calculated the effective tariff rate on China overall to be around 33%.
“The Fed is on hold until we get a little more clarity about not only the magnitude of the tariffs and the breadth of the tariffs, but what effect they all have on inflation and what effect the tariffs and other policies, including the budget bill, will have on growth and employment,” Mester said.
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Despite the words of caution, markets are increasingly confident that rate relief is on the horizon, with nearly 70% now betting the Fed begins easing in September, up from 60% a week ago. Investors are putting a roughly 25% chance on the first cut arriving as soon as July, according to CME Fed projections as of Friday afternoon.
Still, markets have almost fully priced in that the Fed will hold rates steady at next week’s policy meeting.
Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management, said any rate cuts before September would likely require significant labor market deterioration. He also cautioned that the inflation threat hasn’t disappeared, especially with tariff effects still uncertain.
“People are suggesting that maybe the tariffs won’t have an inflationary impact. I think it’s too early to decipher that,” Schutte said. “All the inventories that have been pulled forward by importers, by consumers, by businesses to actually steady and ready themselves for the tariffs may be impacting the inflation data right now. It often has taken time in the past for that to show up in the actual numbers.”
He added that the Fed is in a “wait-and-see time period.”
“That’s where I don’t think the Fed likely cuts until September, unless you see significant weakening in the labor market, and then the question is always: Is it too late or not?”
HSBC US economist Ryan Wang acknowledged the “double-sided risks” tariffs pose, noting that while goods prices will likely continue to rise through the rest of the year, early signs of a cooling labor market could help offset that by exerting downward pressure on inflation.
But while markets may be betting on a smooth path to cuts, Wang warned the Fed will need confidence that inflation isn’t rising in an “uncontrolled fashion” and that activity in the broader economy isn’t slipping too quickly. “The benign version of rate cuts will take time to develop,” he said.
For now, the Fed appears firmly in a holding pattern — acknowledging the encouraging data, but not yet convinced it’s time to shift course.
Allie Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.
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