Federal Reserve officials on May 7 continued their wait-and-see approach as it relates to the impact of President Donald Trump’s tariff policy but cautioned that the risks of higher unemployment and inflation have risen.
For the third consecutive meeting, the Federal Open Market Committee left the federal funds rate unchanged at a range of 4.25% to 4.5% following its two-day meeting. The committee closed out 2024 with three successive rate cuts — quarter-point cuts in December and November, and a half-point reduction in September before implementing a pause in January.
The May 7 decision was unanimous among the committee’s 12 voting members.
Uncertainty about the economic outlook has increased since the Fed's last meeting in March and the committee now “judges that the risks of higher unemployment and higher inflation have risen,” it said in a statement.
Fed Chair Jerome H. Powell made similar points at a news conference and said the tariff increases announced so far have been significantly larger than anticipated.
“If the large increases in tariffs that have been announced are sustained, they’re likely to generate a rise in inflation, a slowdown in economic growth and an increase in unemployment,” Powell said.
Stock and bond markets have seen major volatility since Trump on April 2 implemented a minimum baseline of 10% tariffs on all countries and “reciprocal” tariffs on dozens of others. Trump subsequently delayed the reciprocal tariffs but raised tariffs on China to 145% and sent mixed signals about what his plans are moving forward.
The consumer price index rose an annualized 2.4% in March from a year earlier, below the 2.8% figure recorded in February, and also below forecasts.
Separately, core personal consumption expenditures, or core PCE, the Fed’s preferred inflation gauge, rose 2.5% year-over-year in March, down from the 3% year-over-year increase in February.
And the unemployment rate held steady at 4.2% in April.
Powell said economy is still in a good place, but the Fed may find itself in “the challenging scenario in which our dual mandate goals” of maximum employment and stable prices are in tension.
“For the time being, we’re well positioned to wait for greater clarity before considering any adjustments to our policy stance,” Powell added.
At its meeting in March, committee members signaled two quarter-point rate cuts in 2025, but at the news conference, Powell said any policy decisions will depend on the incoming data and the Fed isn’t on a preset course.
“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,” said Ashish Shah, CIO of public investing at Goldman Sachs Asset Management, in a statement. “Any weakening in the labor market, however, could take a number of months to become apparent, and we see the odds skewed towards another ‘hold’ at next month’s meeting.”
The Fed’s next meeting is June 17-18.
