Fed Unlikely to Cut Rates for Foreseeable Future After Mild April Inflation Report

Mortgage rates will remain unchanged after April inflation data came in as expected. Elevated tariff rates will keep Fed rate cuts on pause for the foreseeable future.

The BLS reported that core prices rose 0.24% from March to April and are up 2.8% from a year ago, largely in line with expectations of a 0.26% increase. Tariffs on Canada, Mexico, and China—as well as autos, steel, and aluminum—predated these data, but the April 2 (“Liberation Day”) tariffs were coincident. As such, there are only hints of the tariff impact in this report. Airfares were once again weak, falling 2.8% from a month ago and hotel prices fell 0.2%, reflecting an ongoing decline in foreign tourism. However, goods prices actually fell with apparel, declining 0.2% from a month ago, indicating no immediate impact from tariffs. This makes sense as new research from the Fed shows that the price impact hits about two months after tariff implementation.

Given this week’s reduction in tariffs on China from 145% to 30%, the Fed is now less likely to cut, as the recession odds have declined while inflation concerns remain. Yesterday’s 90-day pause with China brought the average US tariff rate from about 23% to about 15%—still significantly higher than 2.5% at the beginning of the year. The news signals new trade deals could emerge soon, but last week’s UK deal suggests a 10% floor globally. With China likely to end up higher than other countries, that means the average tariff rate could fall more, but perhaps not much more. For the economy, all of that equates to slower economic growth and higher unemployment, but no formal recession. However, an increase in inflation still remains a threat. That means the Fed has little reason to cut this year, even as markets continue to expect two rate cuts in the fourth quarter.

Mortgage rates will remain elevated near 7% for the foreseeable future barring another surprise on tariffs.

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