The Federal Reserve Board’s May 7 decision to leave interest rates unchanged wasn’t a surprise, but there may be surprises ahead.

Markets are expecting the Fed to cut its benchmark interest rate a couple of times later this year from the current 4.25% to 4.5%. They could be right.

But cuts aren’t the only possibility. Depending on what happens economically in the months ahead, the Fed could lower rates, raise them or leave them unchanged. The Fed’s statement announcing the decision of its May meeting and Chair Jerome Powell’s commentary stress how uncertain the economic outlook has become.

If the economy later this year looks like the economy today, the Fed would likely leave rates unchanged. Today, the statement noted, “inflation remains somewhat elevated” while “the unemployment rate has stabilized at a low level.”

If at future meetings the Fed is confident that inflation is falling to its 2% target, it could indeed cut rates. If at those meetings it sees inflation remaining elevated but the unemployment rate rising, it could also cut.

Those are big ifs, however. The Fed says risks are rising that inflation and unemployment will both worsen during the next several months. If that happens, it could force the Fed to choose between fighting inflation by raising rates or fighting unemployment by lowering them.

“The new administration is in the process of implementing substantial policy changes in four distinct areas: trade, immigration, fiscal policy, and regulation,” Powell said. “The tariff increases announced so far have been significantly larger than anticipated. All of these policies are still evolving, however, and their effects on the economy remain highly uncertain.”

Powell’s Fed is under attack by President Donald Trump, who wanted rate cuts on Wednesday and who calls Powell “Mr. Too Late.” Yet, despite the president’s on-and-off threats to can Powell – which he may not have the legal power to do – don’t assume the Fed will bow to the pressure.

A central bank that appeared to be bowing to political pressure against its better economic judgment would not just be undermining its own independent status. It would risk financial markets panicking.

Trump wants the Fed to cut preemptively, before the economy turns down. But because the Fed doesn’t know whether inflation or unemployment will be the bigger problem in the months ahead, it isn’t sure cutting will make sense. In its economic judgment, waiting, not acting, makes the most sense.

Not only does the Fed have to worry about inflation; it has to worry about inflationary expectations. History suggests that if consumers and businesses believe prices are going to rise, they’ll rise; adjustments to expected inflation cause inflation.

Those expectations are “well anchored” now – Americans aren’t anticipating big future price increases. But that could change quickly if prices start to go up sharply. Memories of supercharged inflation in 2021 and 2022 linger. Expectations could become unanchored easily.

The Fed, then, won’t have the liberty of assuming that tariff-driven price increases are one-time, “transitory” increases, as it mistakenly deemed the supply-chain price increases the country saw during the Covid epidemic. Powell knows he really was “too late” raising rates then.

“Our obligation,” Powell said, “is to keep longer-term inflation expectations well anchored and to prevent a one-time increase in the price level from becoming an ongoing inflation problem.”

Congress has given the Fed a dual mandate – maximum employment and stable prices. But economic history suggests that when push comes to shove, central banks should make stable prices the priority. As Powell put it, “Without price stability, we cannot achieve the long periods of strong labor market conditions that benefit all Americans.”

Farmers, ranchers and other business borrowers have to hope the markets are right and more interest-rate cuts lie ahead. The reality is that the interest-rate outlook is increasingly uncertain, reflecting the increasingly uncertain economic outlook.

Former longtime Wall Street Journal Asia correspondent and editor Urban Lehner is editor emeritus of DTN/The Progressive Farmer.

This article, originally published on May 8 by the latter news organization and now republished by Asia Times with permission, is © Copyright 2025 DTN/The Progressive Farmer. All rights reserved. Follow Urban Lehner on X @urbanize