The Federal Reserve held interest rates steady this evening but said the risks of higher inflation and unemployment had risen, further clouding the economic outlook as the Fed grapples with the impact of Trump administration tariff policies.
The economy overall has “continued to expand at a solid pace,” the Fed said in a policy statement, attributing a drop in first-quarter output to record imports as businesses and households rushed to front-run new import taxes.
The labour market also remained “solid” and inflation was still “somewhat elevated,” the central bank’s policy-setting Federal Open Market Committee said, repeating the language used in its previous statement.
But the latest statement highlighted developing risks that could leave the Fed with difficult choices in coming months.
“Uncertainty about the economic outlook has increased further,” the FOMC said at the end of a two-day meeting during which officials agreed unanimously to keep the Fed’s benchmark interest rate steady in the 4.25%-4.50% range.
“The Committee is attentive to the risks to both sides of its dual mandate and judges that the risks of higher unemployment and higher inflation have risen,” the statement said.
Speaking at a press conference following the FOMC meeting, Fed Chair Jerome Powell said “despite heightened uncertainty, the economy is still in a solid position.”
He noted Fed policy will need to be nimble and said “we believe that the current stance of monetary policy leaves us well positioned to respond in a timely way to potential economic developments.”
Powell also noted that trade policy remains a source of uncertainty that affirms the Fed’s need to be in a wait-and-see mode. “I don’t think we can say…which way this will shake out,” he said, adding “I think there’s a great deal of uncertainty about, for example, where tariff policies are going to settle out.”
The direction of policy will depend on which of the job and inflation risks develop, or, in the more difficult outcome, whether inflation and unemployment increase together and force the Fed to choose which risk is more important to try to offset with monetary policy.
A weaker job market would typically strengthen the case for rate cuts; higher inflation would call for monetary policy to remain tight.
“For the time being the Fed remains in a holding pattern as it waits for uncertainty to clear,” said Ashish Shah, chief investment officer of public investing at Goldman Sachs Asset Management, adding that “recent better-than-feared jobs data has supported the Fed’s on-hold stance, and the onus is on the labour market to weaken sufficiently to bring a resumption of its easing cycle.”
The Fed’s policy rate has been unchanged since December as officials struggle to estimate the impact of President Donald Trump’s import tariffs, which have raised the prospect of higher inflation and slower economic growth this year.
When policymakers last updated their economic and policy projections in March, they anticipated reducing the benchmark rate by half a percentage point by the end of this year.
