The Federal Reserve decided to keep interest rates unchanged on Wednesday, but acknowledged that the risks of both rising inflation and increasing unemployment have grown. These concerns have added more uncertainty to the U.S. economic outlook, as policymakers try to assess the broader impact of President Donald Trump’s tariff policies.
Fed Chair Jerome Powell commented that it remains unclear whether the economy will continue to grow at a steady pace or begin to slow down due to increasing uncertainty and potential inflationary pressures. The path ahead, he suggested, is far from straightforward.
Speaking at a press conference following the Fed’s two-day policy meeting, Powell explained that there is still considerable ambiguity surrounding the eventual outcomes of President Trump’s decisions. Many of these actions may still face legal or political challenges, making it difficult to predict the final impact on the economy.
Powell noted that the full scale, persistence, and consequences of these policy moves are still unknown. As a result, the Federal Reserve finds itself in a position where it cannot confidently determine the best course of action for monetary policy.
He admitted that it is “not at all clear what the appropriate response for monetary policy is at this time.” This highlights how unsettled the current economic environment is and how cautious the Fed must be in its next steps.
In his own words, Powell added, “I don’t think we can say which way this will shake out.” His statement underscores the unpredictability the Fed is facing in making decisions that usually rely on clearer economic signals.
The uncertainty created by the President’s sweeping policy changes has effectively left the central bank in a holding pattern. Until these policies are more clearly defined and implemented, the Federal Reserve is limited in how it can respond.
This cautious stance shows just how closely intertwined U.S. monetary policy has become with wider political developments, and how difficult it is for institutions like the Fed to plan ahead in such a volatile environment.
The Federal Reserve’s latest policy statement confirmed that the benchmark overnight interest rate remains unchanged, holding steady within the 4.25% to 4.50% range. However, the statement also highlighted growing concern about the economic outlook, noting that uncertainty has increased since the Fed’s previous meeting in March.
According to the central bank, there are now rising risks that both inflation and unemployment could climb in the near future. This cautious tone suggests the Fed is closely monitoring developments but is hesitant to take any immediate action.
Thomas Simons, the chief U.S. economist at Jefferies, commented on the statement, suggesting that it understated the scale of recent disruptions. He believes the Fed’s language does not fully reflect how unpredictable the economic landscape has become since the March 18–19 meeting.
Simons pointed to various developments that have created confusion, including the shifting timeline of tariffs—such as the “Liberation Day” announcements, the 90-day delay announced on 9 April, and the ongoing changes around trade deals and exemptions. These rapid changes have significantly impacted business sentiment and consumer confidence.
He argued that the volatility in news headlines, along with growing uncertainty in economic surveys, has made it nearly impossible to assess the true state of the economy. With such instability, determining whether the balance of risks has shifted is increasingly difficult.
Simons described Jerome Powell, the Fed Chair, as “predictably noncommittal” in his response to these challenges. He suggested that Powell’s cautious approach is understandable, given the lack of clarity on how these policy shifts will ultimately affect the economy.
Overall, the message from both the Fed and market experts is one of growing caution. With so many variables in play, including international trade dynamics and fluctuating economic data, the path forward remains highly uncertain.
This highlights how external political and policy factors are now playing a significant role in shaping central bank decision-making, limiting the Fed’s ability to act decisively in the short term.
RISKS TO DUAL MANDATE
The Federal Reserve, in its latest statement, reiterated its confidence in the resilience of the U.S. economy. Fed Chair Jerome Powell noted continued job growth and described the economy as still expanding at a “solid pace.” He explained that the reported fall in GDP during the first quarter was largely due to a surge in imports, as both businesses and consumers rushed to purchase goods ahead of expected tariff increases. Despite this dip, underlying domestic demand remains on an upward trend.
However, this surge in imports also highlighted a broader challenge for the Fed. The spike in purchasing is unlikely to happen again, raising questions about whether underlying demand and investment may be starting to falter. If that proves to be the case, the effects could eventually be seen in key indicators such as employment and inflation.
Supporting this cautious tone, the Fed’s recent “Beige Book” – a compilation of anecdotal reports from around the country – painted a more subdued picture of the economy. It referenced stalled business activity, declining demand, and increasing prices, suggesting that uncertainty is weighing heavily on confidence.
Powell acknowledged these concerns, stating that both consumers and businesses are showing signs of hesitation, delaying major economic decisions. He added that if such uncertainty persists, it would likely begin to reflect in the official economic data.
Despite the warning signs, the Fed is not yet ready to adjust interest rates or other policy tools. Powell emphasised that the central bank needs more clarity before taking action. The Fed remains focused on its dual mandate: keeping inflation around 2% while supporting maximum employment.
He reassured that the current monetary stance gives the Fed flexibility to react quickly should the situation shift. For now, the central bank is maintaining its wait-and-see approach – a hallmark of its policy stance in the early months of the Trump presidency.
Following the Fed’s policy announcement, U.S. stock markets gained momentum and closed higher on the day. At the same time, Treasury yields dropped, while the U.S. dollar strengthened against a basket of international currencies.
‘HOLDING PATTERN’
The Federal Reserve’s future decisions on interest rates will largely depend on how inflation and employment trends evolve. If both begin to rise at the same time, the central bank may be forced to choose which risk to tackle more urgently – an increasingly complex balancing act.
Typically, a weaker jobs market would justify cutting interest rates to support economic growth. On the other hand, a rise in inflation would likely push the Fed to maintain a tighter monetary policy to prevent prices from climbing too quickly.
According to Ashish Shah, chief investment officer for public investing at Goldman Sachs Asset Management, the Fed is currently in a holding pattern. He explained that recent job data, which came in better than expected, has given the Fed reason to keep rates unchanged for now. However, he pointed out that unless the labour market shows signs of significant weakening, the Fed is unlikely to resume rate cuts any time soon.
Interest rates have remained steady since December, as officials continue to assess the impact of former President Trump’s tariffs. These trade measures have created uncertainty, raising the possibility of both higher inflation and slower economic growth.
Back in March, when the Fed last updated its economic and policy forecasts, officials had projected a potential cut of 0.5 percentage points to the benchmark interest rate by the end of the year.
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