The Federal Reserve’s decisions to raise or cut interest rates, or to implement quantitative easing or quantitative tightening, are all made by considering four aspects:
1. U.S. economic data indicators (CPI + non-farm payrolls + unemployment rate)
The Federal Reserve does not look at a single data indicator, but evaluates everything through three major indicators before making a decision. For example:
Growth in CPI data means strong U.S. consumer spending and persistently overheated inflation. The way to curb this is to raise interest rates to suppress inflation and cool the market, so it is positive for the U.S. dollar and negative for the capital markets, and vice versa.
Non-farm payroll data: if non-farm employment increases, it means businesses need more workers, the economy is booming, and the Federal Reserve will tend to keep interest rates high. This is positive for the U.S. dollar and negative for the capital markets, and vice versa.
A lower unemployment rate means strong U.S. employment, an overheated economy, and the Fed would tend to maintain high interest rates. That would be good for the U.S. dollar and bad for capital markets—and vice versa.
Overall:
Hot data (high inflation, strong jobs, low unemployment) → the Fed leans toward high rates → the dollar strengthens;
Weaker data → rate-cut expectations heat up → the dollar weakens, and risk assets are more likely to rise.
2. The second layer influencing Fed decisions: U.S. Treasury debt
Now U.S. Treasury debt has already exceeded $40 trillion. Based on the Fed’s current policy rate of 3.5%–3.75%, the U.S. pays about $1.4 trillion in interest expenses per year. That already exceeds U.S. defense spending. In 2025, according to the Treasury Department’s statistics, U.S. tax revenue is roughly $5.24 trillion. This share is 27% of total tax receipts—equivalent to a household earning $100 per day, with $27 going to interest payments! And after adding other spending, the U.S. budget has remained in deficit. So it can only “print new money to pay old debts,” meaning U.S. Treasury debt will keep rising, and interest expenses will only grow more. At this point, if the Fed hikes rates again, it would increase spending in the interest-rate (interest expense) category; conversely, cutting rates would reduce interest expense.
For every 1 percentage point reduction in interest rates, the U.S. can save roughly $130 billion in Treasury interest each year. U.S. politicians pushing for rate cuts is not simply driven by economic considerations; it’s driven by the fiscal “must-have” need created by heavy debt—this is also the core reason the U.S. government keeps pressuring the Fed.
But the Federal Reserve cannot fully give in. Once markets believe the central bank has lost independence, inflation expectations will spiral out of control, and long-term U.S. Treasury yields would actually rise further, exacerbating debt risks.
So the two sides end up in a game of tug-of-war: the government wants to cut rates to reduce the burden, while the Fed sticks to policy independence—making confrontation the norm.
3. The third layer influencing Fed decisions: geopolitical factors
Take the Iran-U.S. conflict as an example: escalation would raise shipping risks through the Strait of Hormuz, pushing up international oil prices. Higher energy prices directly raise the U.S. CPI, which constrains the Fed’s room to cut rates.
The Fed’s key judgment hinges on whether the oil price shock is short-lived or persistent.
If it’s only a temporary fluctuation, the Federal Reserve will most likely stand by and wait for the situation to calm down. But once oil prices remain at high levels for the long term and inflation spreads to more areas—such as services and wages—the Fed may even restart interest rate hikes.
Geopolitical risk has always been the Damocles’ sword hanging over this rate-cut cycle.
4. The fourth layer influencing Fed decisions: the U.S. midterm elections
The U.S. presidential election is another major variable. Rate cuts and easing can lift the stock market, increase the public’s sense of wealth, and benefit the ruling party in winning votes. Therefore, as the election approaches, the U.S. government’s pressure on rate cuts will increase sharply, putting even more strain on the Federal Reserve.
But the Fed’s credibility comes from being insulated from election-driven political interference. The contest between the U.S. government’s demands and central bank independence would also keep amplifying market volatility.
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