US Federal Reserve holds interest rates steady

In a widely anticipated move, the Federal Reserve announced on Wednesday that it would maintain its benchmark interest rate at the current range of 4.25% to 4.50%, marking the third consecutive meeting without a change. The decision reflects the central bank’s cautious approach amid growing concerns over inflation and employment, largely influenced by recent trade policies.

The Fed’s decision comes in the context of President Donald Trump’s recent imposition of sweeping tariffs, including a 145% duty on Chinese imports and a 10% baseline on most others. These measures have introduced significant uncertainty into the US economy. Fed Chair Jerome Powell acknowledged the potential for these tariffs to simultaneously drive-up prices and suppress job growth, a combination that could lead to stagflation – a scenario characterised by stagnant economic growth and high inflation.

“We’ve judged that the risk to higher inflation and unemployment has risen,” Powell stated during a press conference. He emphasised the need for a “wait and see” approach, given the unpredictable nature of the current economic landscape.

George Lagarias, Chief Economist at Forvis Mazars, commented on the Fed’s stance, saying: “The Fed has kept rates at the same level, firmly planting its feet in the ‘we don’t know’ camp. While acknowledging that risks have risen, the US central bank shied away from predicting the direct impact of tariffs on growth and inflation, instead focusing on responses in different scenarios. The Fed knows that to maintain its independence, it needs to stay squarely on the economic side of the fence. That means focusing less on forecasting and becoming even more data-dependent. That will likely put them behind the curve when and if inflation starts to move again.”

Recent economic data presents a complex picture. The US economy contracted by 0.3% in the first quarter, marking the first decline in three years. Conversely, the labour market remains robust, with 177,000 new jobs added in April. Inflation, as measured by the Personal Consumption Expenditures (PCE) Price Index, stood at 2.4% in March, slightly above the Fed’s 2% target.

Financial markets responded positively to the Fed’s announcement. The S&P 500 rose by 0.4%, the Dow Jones Industrial Average gained 284 points (0.7%), and the Nasdaq composite increased by 0.3%. Investors were also buoyed by reports of upcoming US-China trade talks in Switzerland, aimed at resolving ongoing tariff disputes.

Despite the Fed’s current stance, many economists anticipate potential rate cuts later in the year, possibly starting in July or September, depending on how the economic situation evolves. The central bank has indicated its readiness to adjust monetary policy as necessary, should risks to its dual mandate of maximum employment and price stability emerge.