- The Federal Reserve kept interest rates steady at 4.25% to 4.5% for the third consecutive meeting, resisting President Trump’s calls for cuts amid rising economic uncertainty from his tariff policies.
- Fed Chair Jerome Powell highlighted elevated risks of inflation and unemployment due to tariffs, noting the economy contracted in Q1 2025 for the first time in three years, driven by trade disruptions.
- Despite a resilient labor market with a stable low unemployment rate, the Fed remains cautious, prioritizing data-driven decisions as it evaluates the tariffs’ impact on employment and inflation.
The Federal Reserve’s decision to maintain its benchmark interest rate at 4.25% to 4.5% on Wednesday, marking the third consecutive meeting without a change, reflects a cautious approach amid heightened economic uncertainty driven by President Trump’s tariff policies, as articulated by Fed Chair Jerome Powell. Despite Trump’s public push for rate cuts to complement his aggressive trade measures, the unanimous vote by policymakers underscores concerns about the potential for tariffs to elevate inflation and unemployment risks, with Powell noting that the economic outlook’s uncertainty is “extremely elevated.” The Fed’s stance comes as the U.S. economy, while still expanding at a solid pace, contracted in the first quarter of 2025 for the first time in three years, largely due to importers rushing to preempt Trump’s tariffs, which impacted net exports.
Powell emphasized a deliberate pace in future decisions, stating the Fed does not “need to be in a hurry” as it assesses the tariffs’ effects on employment and inflation, particularly given their potential to disrupt trade with major partners like China and the EU. The labor market, however, remains a bright spot, with the unemployment rate stabilizing at a low level and an April jobs report confirming resilience despite market turbulence following Trump’s “Liberation Day” tariff announcements. The Fed’s statement acknowledged that swings in net exports have influenced recent data, yet policymakers view the job market as solid, even as they flagged rising risks of higher unemployment and inflation due to trade policy shifts.
The decision to hold rates steady aligns with the Fed’s broader strategy to balance economic growth with price stability, following a full percentage point rate cut in the fall of 2024 that brought the benchmark to its current range. Powell’s candid admission that he cannot predict “which way this will shake out” reflects the complexity of forecasting in an environment where tariffs could increase costs for consumers and businesses, potentially reigniting inflationary pressures last seen in 2022 – 2023. The Fed’s focus on data-driven policy is critical as Trump’s tariffs, including up to 25% on imports from Canada and Mexico, threaten to disrupt supply chains and elevate costs in industries like automotive and agriculture. By maintaining rates, the Fed signals confidence in the economy’s current trajectory while reserving flexibility to respond to trade-driven disruptions, ensuring monetary policy remains a stabilizing force in an increasingly volatile global landscape.
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