Trump Wants the Fed to Cut Interest Rates. It Can’t for 2 Reasons.

President Donald Trump has been making increasingly urgent calls for the Federal Reserve to cut interest rates, but the central bank is in a tough spot.

As the Fed kicks off its May policy meeting on Tuesday, there’s little expectation of a rate cut, but the chance of rates coming down at later meetings is also low, JPMorgan analysts said.

The bank sees two reasons Fed officials have their hands tied when it comes to monetary policy.

Inflation expectations are rising

The outlook on inflation — coupled with deteriorating soft data — is one reason rates wouldn’t be cut at this point, JP Morgan said.

The latest consumer inflation report saw a 2.4% year-over-year rise in March, above the Fed’s 2% target. That’s still rather low compared to what could come: The one-year outlook compiled by the University of Michigan stands at 6.5%.

Trump’s tariff policy, which is projected to raise costs for consumers, is the main driver of the jump in expectations. Trade war fears have contributed to rising stagflation risks, ramping up the chances that the US economy finds itself in a position in which growth stalls and prices keep rising. Such a scenario effectively paralyzes the Fed, which can’t respond to both problems at once.

“Sequencing could become tricky, as there is a chance that inflation prints spike first, before any clear softening in hard data, which would put Fed in a very difficult position,” JPMorgan wrote.

Recession not yet priced in

While soft data like future inflation expectations could ultimately be a problem for investors when it weakens, that’s been overshadowed by encouraging hard data, at least for now.

The latest macroeconomic figures have continued to hold up and, in some cases, look relatively strong. A surprisingly positive April nonfarm payroll report on Friday boosted investor confidence and pushed stocks higher.

In other words, the market is not indicating that a recession is imminent.

“After all, SPX is still trading at 21x forward, on 10% EPS growth expectation for this year, and 14% for next. That is far from pricing in any meaningful recession fears,” analysts wrote.

That suggests investors aren’t pricing in the first half of stagflation — weak growth—as institutions and households continue loading up on stocks, the bank said.

“The actual recession could still be avoided, but if one were to come through, the views by many that it is already in the price could prove to be too optimistic,” the bank wrote.

Overall, the bank says the Fed is “stuck” dealing with competing macro forces, which will potentially leave it behind the curve when it’s eventually forced to act.