US Interest Rate Forecast: Will the Federal Reserve be Dovish?

On May 6-7, the Federal Reserve, through a committee called the Federal Reserve Federal Open Market Committee (FOMC), will meet to discuss several important points related to the US economy, including interest rates.

Before the meeting, President Donald Trump exerted some political pressure, urging interest rates to be lowered to support the pace of US economic growth.

In this condition, it must be acknowledged that although the Federal Reserve is independent, external political forces can influence policy.

So, how does the Federal Reserve set US Interest Rates? Here are some forecast analyses.

Federal Reserve and Political Stand

The Federal Reserve, often called "the Fed," is the central bank of the United States. It plays a vital role in the country’s economy by managing inflation, guiding employment levels, and maintaining financial stability. 

The most well-known way it does this is by setting interest rates, which influence how expensive it is to borrow money. This affects everything from mortgages and business loans to credit card debt and savings.

Unlike many other parts of the U.S. government, the Federal Reserve is designed to be independent from political control. 

This independence is intentional and critical. Although the Fed operates within the federal government's framework, its decisions are not dictated by the President, Congress, or any political party. 

This setup allows the Fed to focus on long-term economic health rather than short-term political goals, such as winning elections or gaining public approval.

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Recent Political Pressure on the FED

That said, the Fed doesn’t exist in a vacuum. Political leaders, especially U.S. Presidents, often have strong opinions about what the Fed should do. 

For example, when the economy slows down or inflation rises, presidents may publicly pressure the Fed to take certain actions, like cutting interest rates to stimulate growth or keeping them low to help reduce the cost of borrowing.

In 2025, for instance, President Trump and Treasury Secretary Scott Bessent have been urging the Federal Reserve to lower interest rates, arguing that this would help offset the negative impact of tariffs and boost the economy. 

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They’ve also criticized Fed Chair Jerome Powell for being too cautious. However, despite this political pressure, the Fed is expected to keep rates steady because inflation remains above its target, and it wants to avoid overheating the economy.

This situation highlights the delicate balance the Fed must maintain: it listens to political leaders but bases its decisions on economic data and forecasts, not political agendas. 

And while the President appoints the Fed Chair, once confirmed, that person serves a fixed term and cannot be easily removed, which protects the Fed from being manipulated for political gain.

US Interest Rate Forecast: Will the FED be Dovish?

Following the much-anticipated Federal Open Market Committee (FOMC) meeting held on May 6–7, 2025, the Federal Reserve has decided to keep interest rates unchanged, maintaining the federal funds rate at its current range of 4.25% to 4.5%. 

This decision reflects the Fed's cautious stance as it navigates a complex economic landscape marked by stubborn inflation, modest job growth, and uncertain global conditions.

A Balancing Act: Inflation vs. Growth

One of the main reasons the Fed opted not to change interest rates is the ongoing struggle with inflation. As of March 2025, the Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) index, rose by 2.6% year-over-year. 

This is above the Fed's official target of 2%, signaling that price pressures remain a concern, especially in the wake of new tariffs implemented by the Trump administration. These tariffs are contributing to higher input costs, which risk pushing inflation even higher.

At the same time, the U.S. economy is showing mixed signals. While the unemployment rate remains steady at 4.2% and 177,000 new jobs were added in April, the economy contracted by 0.3% in the first quarter of 2025. 

This contraction has sparked worries about the potential for a broader economic slowdown.

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Political Pressure and Market Reactions

Despite political pressure from President Donald Trump and Treasury Secretary Scott Bessent, who have both urged the Fed to cut rates to support economic growth, the Fed has chosen to wait. 

President Trump’s recent tariff decisions have added uncertainty to the economic outlook, and although he has criticized Fed Chair Jerome Powell for being overly cautious, he also stated he would not remove him before his term ends in 2026.

Meanwhile, the financial markets are increasingly betting that the Fed will begin cutting rates starting in July 2025, assuming inflation starts to cool and the economy shows signs of continued weakness. 

But for now, the Fed is signaling that it prefers to wait for more data before making any policy changes.

Expert Opinions

Several analysts have weighed in on the Fed's current stance:

Douglas Porter, Chief U.S. Economist at BMO Capital Markets, noted that the Fed is “remaining on hold” while evaluating how recent tariffs might ripple through the economy.

Nancy Vanden Houten, Lead U.S. Economist at Oxford Economics, said the Fed has enough data to justify caution, especially while waiting to see how inflation and consumer behavior respond to new trade policies.

Read Also: The Fed is Still Not Dovish! Blames Tariff as Cause

The Federal Reserve is holding interest rates steady after the May 2025 meeting, reflecting its careful approach amid inflationary concerns and political noise. 

Although the job market remains relatively strong, broader economic indicators suggest a cooling economy. 

Analysts believe that unless inflation falls significantly, the Fed will likely continue this cautious path through the summer, with possible rate cuts coming later in 2025 if economic conditions warrant it.

Final Note

As of May 2025, the Federal Reserve is not yet adopting a fully dovish stance, but is leaning toward caution. 

By holding interest rates steady at 4.25%–4.5% during the May 6–7 FOMC meeting, the Fed is signaling a neutral-to-cautious outlook rather than an aggressive push to stimulate the economy.

Although inflation remains above target and economic growth has softened, the Fed is waiting for clearer signs of a sustained downturn or disinflation before making any rate cuts. 

Political pressure from the Trump administration is strong, but the Fed continues to assert its independence, prioritizing long-term stability over short-term political goals.

Looking ahead, markets are pricing in potential rate cuts starting in July 2025, suggesting that if inflation cools and economic weakness deepens, the Fed may shift to a more dovish position in the coming months.

The Fed is cautious, not yet dovish, but could pivot if conditions worsen.