The Federal Reserve held interest rates steady yesterday but said the risks of higher inflation and unemployment had risen, further clouding the economic outlook as the US central bank grapples with the impact of Trump administration tariff policies.
Fed chairman Jerome Powell in his afternoon Press conference repeatedly said the central bank does not “need to be in a hurry” as it evaluates how Trump’s tariffs affect the economy and inflation in the months to come.
“I don’t think we can say which way this will shake out.”
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 central bank’s benchmark interest rate steady in the 4.25 per cent-4.50pc 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.
US Treasury yields were little changed and stocks slightly extended gains after the release of the statement. Traders continued to eye a rate cut at the Fed’s meeting in late July.
The direction of policy will depend on which of those 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 labor market to weaken sufficiently to bring a resumption of its easing cycle.”
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