The Federal Reserve maintains interest rates stable: carefully weighing inflation and unemployment risks under the impact of tariffs

On Wednesday, Federal Reserve officials unanimously agreed to keep interest rates stable and warned of the risk of rising unemployment and inflation caused by tariffs. This decision reflects the Fed’s cautious attitude in the face of the complex economic situation brought about by the Trump administration’s tariff policy. This article will analyze in detail the Fed’s latest policy trends, market reactions, and possible future policy paths.

The Fed’s considerations behind keeping interest rates stable

Fed Chairman Powell stressed at the press conference after the meeting that if the announced sharp increase in tariffs continues, it could lead to higher inflation, slower economic growth and higher unemployment. Tariffs, as a shock, reduce the economy’s ability to supply goods or services while causing price increases. This uncertainty may cause companies to postpone new investments before understanding their underlying cost structure, thereby weakening corporate profits.

The policy change has brought a dilemma to the Fed: should it pay more attention to the possibility of rising inflation or the risk of rising unemployment? Powell used the word “wait” several times at the press conference, emphasizing that the Fed believes the cost of waiting to learn more about the economy is “quite low” and that officials do not think there is a need to rush to adjust policy.

The comments are a change from 2019, when the Fed cut rates three times to support the economy from the trade war, but inflation concerns were much smaller. Now that the U.S. economy has just gone through a period of high inflation, Fed officials believe they can’t risk preemptively lowering rates, which could exacerbate price pressures.

Market reaction and analyst views

The Fed’s decision and Powell’s remarks have attracted widespread attention and interpretation from the market. After the release of the policy statement, the US dollar index fell first and then rose by 0.35%, the euro fell by 0.51%, the S&P 500 index briefly fell and then rose slightly by 0.17%, the 10-year US Treasury yield fell to 4.2791%, and the 2-year yield fell first and then rose to close at 3.793%.

Matthias Scheiber, head of the multi-asset team at Allspring Global Investments, believes that the Fed has adopted a “wait-and-see” strategy that is widely expected by the market, and expects that September or later may be the window for interest rate cuts. Garrett Melson, portfolio strategist at Natixis Investment Managers, pointed out that if economic growth continues to cool, the possibility of starting a rate cut before July is increasing, and it may form a continuous operation.

Jason Pride, chief investment strategist at Glenmede, believes that this statement formally confirms that stagflation pressure is the core challenge of the Federal Reserve, and the policy path depends entirely on the outcome of the struggle between “stagnation” and “inflation”. Julia Herman, global market strategist at New York Life Investments, said that the Federal Reserve is trapped in a typical stagflation dilemma, and only a significant deterioration in economic data will trigger substantial easing.

Policy divergence between the Fed and other economies

The U.S. faces unique challenges for monetary policy compared with other economies, which haven’t imposed large tariffs on imports and are therefore seeing the effects of weaker demand and a weaker labor market without having to deal with rising price pressures. The European Central Bank has cut its benchmark interest rate seven times in the past year, by a total of 1.75 percentage points to 2.25% last month. Investors and economists expect the Bank of England to cut its benchmark interest rate by at least 25 basis points on Thursday.

Dutta, head of economic research at Renaissance Macro Research, pointed out that Europe’s economy was not particularly strong to begin with, so they have more reason to worry about the impact on growth. In contrast, the Federal Reserve will only cut interest rates if it sees evidence of a significant slowdown in the economy, and it may do so quickly.

Economists at JPMorgan Chase & Co. expect the Fed to cut rates in September, while Goldman Sachs Group Inc. sees the central bank cutting rates three times this year starting in July. Goldman Sachs chief economist Jan Hatzius said there was a chance the ECB could cut rates more than forecast, especially if inflation in Europe ends up below 2%.

The Fed’s future policy path

Looking ahead, the Fed’s policy path will depend on how inflation and unemployment evolve. Some economists worry that rate cuts will stoke inflation, while others argue that the Fed could cause a sharper downturn by keeping rates steady as the economy slows.

Peterson Institute for International Economics President Paul Posen said that accelerating rate cuts now would increase the risk that the Fed would have to reverse course by raising rates in a few months. He pointed out that people in or close to the government are contradicting themselves by criticizing the Fed for too high inflation while arguing that the tariff shock will not have any impact on inflation.

English, a professor at the Yale School of Management, believes that although the market expects an economic slowdown, hard data has not yet shown it. Some economists point out that today’s situation is fundamentally different from the inflation shock that frustrated the Federal Reserve and other central banks in 2021. Today, the labor market is cooling, wage growth is slowing, and the fuel to maintain inflation may be reduced after the initial tariff-driven price increases.

Market expectations for inflation over the next five to 10 years, derived from inflation-protected bonds, have been at the lower end of the range seen over the past year. Garrett Myerson of Natixis Investment Managers believes that the key lies in how inflation and growth play out: the momentum of U.S. economic growth is expected to continue to weaken, and the Federal Reserve wants to cut interest rates to support the economy, but short-term price pressures may put decision-making in a dilemma.

Summarize

The Fed’s decision to keep interest rates steady at its meeting on Wednesday reflects its cautious approach in the face of the complex economic situation brought about by the Trump administration’s tariff policy. Powell’s “wait-and-see” strategy emphasizes the importance of waiting for more economic data, while revealing the Fed’s difficult trade-off between inflation and unemployment risks.

The market reacted positively to the Fed’s decision, but analysts are divided on the future policy path. Some believe that the Fed may start cutting interest rates in July or September, while others worry that premature rate cuts may exacerbate inflationary pressures. Compared with other economies, the US monetary policy faces unique challenges and needs to find a balance between slowing economic growth and inflation risks. In the future, the Fed’s policy direction will depend on further developments in economic data. Market participants should pay close attention to indicators of inflation, unemployment, and economic growth to better predict the Fed’s next move.