The Federal Reserve has decided to keep interest rates steady, maintaining the benchmark rate between 4.25% and 4.5%. This decision comes amid rising economic uncertainty and concerns about potential stagflation risks. In the post-meeting statement, the Federal Open Market Committee (FOMC) highlighted recent market volatility and its impact on policy decisions.
The statement noted that “uncertainty about the economic outlook has increased further” and that the Committee is attentive to risks to both sides of its dual mandate, judging that “the risks of higher unemployment and higher inflation have risen.”
During the press conference, Federal Reserve Chair Jerome Powell acknowledged that trade policies, including tariffs imposed by the Trump administration, were a significant factor in the decision. Stocks briefly ceded some gains after the rate announcement but mostly recovered, despite concerns over the Fed’s characterization of the economic risks. Economist Krishna Guha from Evercore ISI commented, “The May FOMC statement in effect warns that a large trade shock is still set to hit the economy in spite of efforts by the Trump administration to de-escalate, with the Fed seeing the risks ahead as two-sided and not providing any early dovish lean in favor of a June rate cut.
The net implications for risk assets are negative.”
The Fed faces the challenge of balancing its dual mandate of full employment and stable prices amid ongoing trade policies. The statement highlighted the potential for a stagflationary scenario, a condition largely absent from the U.S. since the early 1980s. Policymakers have largely agreed that the central bank is in a good position to be patient as it calibrates monetary policy.
Powell affirmed during the press conference that “the economy itself is still in solid shape.”
The Fed’s deliberations come as the U.S. is engaged in trade negotiations with key trading partners, following a 90-day period that began in early April. President Trump implemented 10% tariffs on U.S. imports with the potential for additional duties pending ongoing talks.
Fed’s economic balance act
The economy has shown mixed signals regarding growth, inflation, and consumer and business sentiment. Gross Domestic Product (GDP) has fluctuated due to changes in consumer and government spending alongside a surge in imports ahead of the tariffs. Most Wall Street economists predict that the economy will return to positive growth in the second quarter.
The FOMC statement maintained that “swings in net exports have affected the data” but reiterated that the economy “has continued to expand at a solid pace.” Job growth has remained strong, with the unemployment rate holding steady at 4.2%. Inflation has been edging closer to the Fed’s 2% target, although tariffs are expected to result in a one-time rise in prices. Recent indications of progress in trade negotiations and some softening stances have helped reverse a large stock market sell-off after President Trump’s April 2 announcement.
However, business surveys show anxiety with managers concerned about tariffs’ impact on supplies and pricing. Market pricing on future Fed actions has also been volatile, with many traders now expecting a rate reduction later this year. The FOMC’s decision to keep the benchmark rate steady was unanimous.
The fed funds rate is used by banks for overnight lending and influences various other loans, including auto and credit cards. As trade talks continue and the economic landscape evolves, the Federal Reserve’s actions will remain under close scrutiny by economists, businesses, and investors.
