Financial markets bet that the Federal Reserve will cut interest rates in the second half of the year.
For the Fed, the first half of the year was all about uncertainty. Officials have kept the central bank's key interest rate steady, at a range of 4.25% to 4.5%, due to concerns that President Donald Trump's tariffs will push up inflation. That's left borrowing costs on all kinds of loans elevated.
Fed Chair Jerome Powell reiterated his concerns about tariffs in his June 24 testimony before Congress. He noted that the impact tariffs will have on the economy is still unknown, especially since Trump has yet to finalize tariff levels for dozens of countries. Forecasters expect that by the end of the year, the Fed will have enough clarity to start cutting rates, though not by very much.
Markets are pricing in a likelihood that the Fed will cut its key fed funds rate at its September meeting by a quarter of a point, and will follow that up with one more cut by the end of the year. That would leave the fed funds rate at a range of 3.75% to 4%, according to the CME Group's Fed Watch tool.
Independent forecasters are divided as to when the first rate cut will come; some expect a September cut, while others think the Fed will stay in a holding pattern until December.
What happens to interest rateswill depend on what happens with the economy, since the Fed is tasked with using monetary policy to keep inflation under control while also keeping unemployment low. Economists expect the tariffs to push up consumer prices (a risk to inflation) and slow down the economy (a risk to the job market) in the coming months.
So far, the job market has held steady, though economists anticipate that tariffs will eventually hurt hiring, fueling concerns about a downturn later this year. An uptick in layoffs could pressure the Fed to cut rates to lift the economy and the job market.
Meanwhile, inflation measures have stayed relatively tame despite the tariffs. However, forecasters expect inflation gauges, such as the Consumer Price Index, to tick higher this summer as merchants pass the cost of tariffs on to consumers.
And any significant jump in consumer prices could speed up the timeline for a Fed cut.
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