'That's the million-dollar question': Wall Street divided on Fed rate cuts as tariff uncertainty lingers

After a week marked by trade flare-ups, record-breaking stock market highs, and trillion-dollar valuation milestones for AI darling Nvidia (NVDA), Wall Street remains locked in a heated debate over the Federal Reserve’s next move.

While some firms like Goldman Sachs have pulled forward their expectations for a September rate cut, others have warned that tariffs and lingering inflation risks may force the Fed to hold off until later this year or possibly next.

“This is the million-dollar question,” Neel Mukherjee, chief investment officer at TIAA Wealth Management, told Yahoo Finance when asked about the Fed’s rate-cutting path. “Inflation still hasn’t been impacted by these tariffs, which has surprised a lot of people … but the Fed is focused on inflation because they’re worried about goods inflation. And that will accelerate.”

Economists have echoed concerns that the risk of higher prices still lingers, a view shared by many on Wall Street. Investors will get their next major test early this week when the latest Consumer Price Index (CPI) is released. While CPI has been trending lower on a monthly basis since Trump’s initial tariff announcements in April, uncertainty around the inflation outlook remains.

Meanwhile, ongoing political pressure is adding fuel to the fire. Last week, President Trump continued his public campaign for lower rates, calling Federal Reserve Chair Jerome Powell “Too Late Powell” and demanding deep rate cuts to ease the burden on consumers.

“Our Fed Rate is AT LEAST 3 Points too high,” Trump said in a Truth Social post on Wednesday. “LOWER THE RATE!!!”

Read more: How much control does the president have over the Fed and interest rates?

Michael Kantrowitz, chief investment strategist at Piper Sandler, argued that while Trump’s call for deep rate cuts may be extreme, the broader message — that policy remains too restrictive for many Americans — holds weight.

“Just because the overall economy and market, which is increasingly a reflection of the largest businesses and wealthiest consumers, appears to be chugging along doesn’t mean that lower rates aren’t warranted,” Kantrowitz said in a note to clients on Wednesday.

He added that scars from the 2022 inflation shock have left policymakers overly cautious.

“This is recency bias at its best,” he said. “We are not in the COVID backdrop any longer and tariffs as an inflation risk akin to the 2022 experience is exaggerated. Tariffs are a narrow tax, likely to lead to demand destruction, substitution and pockets of price hikes rather than broad-based inflation.”

Kantrowitz pointed to the weakening housing market as a key reason the Fed should act: “Historically speaking, every single broad-based improvement in the US economy began with an improvement in housing, and for that to occur we’ll need to see lower rates.”

To cut or not to cut?

That message appears to be resonating in some corners of Wall Street.

Goldman Sachs recently pulled forward its forecast for the next rate cut to September, up from its previous December projection. The firm now expects three 25-basis-point cuts in September, October, and December. The bank cited weaker-than-expected tariff impacts and a softening labor market as key drivers behind the shift.

But not everyone is convinced a September cut is a done deal.

Jeff Schulze, head of economic and market strategy at ClearBridge Investments, said he sees a scenario in which the Fed delays easing until later in the year.

“The Fed may sit on their hands longer than what’s currently being priced into the markets,” he told Yahoo Finance. “And if that happens, companies that don’t have as many offsets to the tariff pressures may continue to struggle in this environment.”

Read more: What experts say about the possibility of additional rate cuts

Steve Sosnick, chief strategist at Interactive Brokers, echoed that uncertainty, arguing that the inflation picture remains too murky, especially with tariffs in flux.

“We can’t know [how tariffs will be baked in] because the numbers keep changing,” he said. “There’s too much uncertainty for the Fed to really move.”

Even the Fed itself appears divided. Minutes from its June policy meeting revealed a split committee, with “most” officials supporting at least one rate cut this year while “a couple” signaled they’d be open to moving as early as July. Others preferred to hold rates steady through year-end.

That policy limbo is already showing up in markets, with traders pricing in a 60% chance of a September rate cut, according to the CME FedWatch tool. The odds of the Fed holding steady in July are near 100%.

Allie Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.

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