Wall Street’s balancing act: Inflation cools, but rate cuts remain elusive

2 minutes read

12 June 2025

Wall Street’s balancing act: Inflation cools, but rate cuts remain elusive

The sun rose on Wall Street this morning with a hint of caution in the air. After a blistering rally, US stocks took a pause, digesting the latest inflation numbers and the ongoing chess match between the Federal Reserve and global trade policy. It’s a story of hope, hesitation, and the ever-present question: what’s next for the world’s largest market?

Inflation softens, but uncertainty lingers

The May Consumer Price Index (CPI) figures landed with a soft thud—rising just 0.1%, less than most economists expected. For a market jittery about the impact of tariffs and rising goods prices, this was a welcome surprise. “If inflation data contradicts the prevailing concerns linked to tariff discussions and appears cooler, that could serve as a catalyst to test those previous highs,” said Jay Woods, chief global strategist at Freedom Capital Markets.

But beneath the surface, the story isn’t so straightforward. The core CPI, which strips out food and energy, ticked up by 0.3%, nudging the 12-month core inflation rate to 2.9%. Nomura economist David Self noted, “The accumulation of inventory prior to tariff announcements and uncertainty regarding the final tariff rates may have delayed price hikes. We still foresee tariffs contributing to heightened inflation figures this summer.”

For everyday Americans, the effects of these numbers are tangible. Rising prices at the checkout and at the petrol pump have become a fact of life. As Baird, a leading investment firm, put it, “Consumers are experiencing the effects of rising prices, and if there’s evidence that inflation could accelerate in the near term, it will exert additional pressure on discretionary spending and could result in a more significant slowdown in growth.” Line chart showing US inflation rate from January to May 2025, with a dip in February, a peak in April at 3.3%, and a slight drop to 3.1% in May.

Fed plays for time as investors watch and wait

With inflation showing signs of cooling but still hovering above the Federal Reserve’s 2% target, the central bank is in no rush to act. Most economists agree: rates will stay put at 4.25%-4.5% for now, with the earliest cut likely in September. As one Reuters survey found, “About 80% believe that it will be 3.75-4% or higher by the end of 2025.”

Fed Chairman Jerome Powell summed up the mood at the last policy meeting: “There is too much uncertainty to say how the regulator should respond to the duties.” The labour market, meanwhile, remains resilient, with unemployment steady at 4.2%—a sign that, for now, the economy can withstand higher borrowing costs.

Investors are left to navigate a market caught between optimism and caution. Since the market’s low point in April, the S&P 500 has surged over 19%, but the path ahead looks choppy. Fiscal policy debates in Washington and the spectre of more tariffs keep nerves on edge.

As the week closes, Wall Street is still searching for its next cue. Will softer inflation give the Fed room to cut rates? Or will trade tensions and fiscal worries keep the brakes on? For now, the market waits—watchful, wary, and ever hopeful for the next chapter in this unfolding story.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Winvesta. We advise investors to check with certified experts before making any investment decisions.