This post is adapted from a recent episode of the Scholar Financial Advising podcast. Listen here for the full discussion.
A listener asked:
“Inflation seems steady. Why hasn’t the Fed started cutting rates?”
It’s a common question right now, and a reasonable one. With inflation cooling from the highs of 2022, many people are wondering why interest rates are still so high. Let’s walk through how the Fed approaches this, and what they’re watching for next.
The Fed’s Mandate: Two Core Goals
The Federal Reserve is focused on two main things:
- Stable prices (meaning controlled inflation)
- Maximum employment (a healthy labor market)
To influence these goals, the Fed has one major lever: interest rates. By adjusting interest rates, they either stimulate the economy (by making borrowing cheaper) or cool it down (by making borrowing more expensive).
How We Got Here: The Rise and Fall of Inflation
When rates are low (as they were in 2020 and 2021) money is cheap. That’s great for growth. People borrow to buy homes and cars, businesses expand, and markets take off. But eventually, that can overheat the economy.
We saw it after the pandemic: demand skyrocketed, supply chains struggled to keep up, and prices surged. Car dealers had lines out the door and jacked up prices. Real estate boomed. People spent freely, fueled by stimulus checks and ultra-low interest rates.
That’s how inflation took hold. To cool things down, the Fed began rapidly raising rates. By 2022, we saw the fastest rate hike cycle in U.S. history.
So Why Not Lower Rates Now?
Inflation has come down—now sitting around 2.5%—but not quite back to the Fed’s 2% target. And unemployment remains low. From the Fed’s perspective, the system is working. The brakes they applied in 2022 are doing their job.
That’s precisely why they’re not cutting rates yet.
If the Fed were to lower rates now, they’d be adding fuel to an already warm economy—risking a resurgence of inflation. Plus, they’d be giving up one of their best tools for fighting a future downturn.
Put simply:
Lowering rates now could spark more inflation—and leave the Fed with fewer options later if a recession hits.
What Could Change That?
The Fed has noted some concerns around trade policy and tariffs, which could influence inflation. If those ripple effects become clearer in the next few months, and inflation softens further, we may start to see movement.
But barring a sharp economic shift, don’t expect aggressive rate cuts any time soon.
The Bottom Line
The Fed isn’t trying to make life harder with high interest rates. They’re just doing what they’ve always done: keeping inflation in check and employment stable.
We’re in a moment of relative balance—and for now, holding rates steady may be the smartest move they can make.
For more insights on inflation, interest rates, and how policy affects investors, listen to the full podcast episode here.