Fed "correctly" torn on question of cutting rates in 2025, Stifel says

Investing.com - The Federal Reserve is "correctly" torn on the question of cutting interest rates in 2025, as policymakers debate the trajectory of U.S. inflation during a time of tariff-fueled uncertainty, according to analysts at Stifel.

Officials at the central bank opted last month to leave rates unchanged at a target range of 4.25% to 4.5%, arguing that the stance was necessary as they weighed the still-unclear effect of President Donald Trump’s aggressive trade agenda on the broader economy.

Fed Chair Jerome Powell later defended the position in a Congressional testimony, although he suggested at a separate event last week that the central bank could once again draw down rates at its remaining meetings this year. Crucially, analysts noted that this would include the Fed’s next gathering this month.

In a note to clients, the Stifel analysts said the Fed’s short-term interest rate "captures [its] policy stance," even though the central bank has emphasized at various points that other monetary tools or variables can be used to impact policy.

The strategists noted that every Fed Chair since Marriner Eccles, who stepped down in 1948, has raised rates at least once during the final 12 months of their tenure. Powell, whose term ends in May 2026, has yet to lift rates during his final year at the helm of the Fed and is not predicted to do so. Inflation remains above the Fed’s 2% goal, but has stayed largely benign even in the face of anticipated upward pressure from Trump’s tariffs.

Against this backdrop, Trump has hurled a slew of insults and criticisms at Powell in a bid to persuade the Fed to quickly ratchet down rates. Powell, however, has shown that he is not in a hurry to do so.

The Stifel analysts predicted that any change in the Fed’s tone before Powell’s departure would likely be "bearish" the benchmark S&P 500.

"Even if the Fed cuts despite sticky inflation the environment we expect in the second half of slowing U.S. core gross domestic product [...] with elevated inflation is more favorable for the ’stagflation trade,’ which dominated in the first quarter of 2025," the analysts said.

They added that they expect the S&P 500 to correct down by 12% from its current level of 6,279.35 to about 5,500.