US Federal Reserve holds key rates amid tariff-driven uncertainties, warns against inflation
Written By Wion Web Desk
Published: May 08, 2025, 06:27 IST | Updated: May 08, 2025, 06:27 IST
Story highlights
Business & Economy: The US Federal Reserve decided to keep key interest rates unchanged at 4.25 per cent – 4.5 per cent, even as US President Trump pushed to cut rates.
The US Federal Reserve decided to keep key interest rates unchanged at 4.25 per cent – 4.5 per cent on May 07, even as US President Trump pushed for the central bank to cut rates immediately.
The Fed cited economic uncertainty due to Trump's trade wars on multiple fronts and recent mixed business activity data.
"In support of our goals, today the Federal Open Market Committee decided to leave our policy interest rate unchanged. The risks of higher unemployment and higher inflation appear to have risen, and we believe that the current stance of monetary policy leaves us well positioned to respond, in a timely way, to potential economic developments," said Federal Reserve Chair Jerome Powell.
The decision reflects the central bank's cautious stance in managing inflationary pressures and a possible economic slowdown, which is in line with market expectations.
“Uncertainty about the economic outlook has increased further,” the post-meeting statement said. “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 Federal Reserve and the stock market had expected lower rates this year as the economy slows down. But the tariffs could throw a wrench in those gears, Fed Chair Jerome Powell said, declining to commit to any rate cuts in 2025.
Donald Trump, who promised lower rates while campaigning for re-election last year, has frequently lashed out on Powell and the Federal Reserve for not easing the monetary policies. Trump has called on the Fed to lower rates "pre-emptively" and flirted with firing the head of the bank, criticising Powell as "a major loser" and "Mr Too Late" for not cutting rates fast enough.
In response toTrump and Vice President JD Vance’s repeated calls for lower interest rates, asserting the Fed’s independence Powell said, “We are always going to do the same thing...use our tools to foster maximum employment and price stability...That’s all we are going to consider,” he said, adding that political pressure has “no effect at all” on the Federal Open Market Committee’s decisions.
Warning against the possible implications of the tariffs, Powell said, “If the large increases in tariffs that have been announced are sustained, they are likely to generate a rise in inflation, a slowdown in economic growth, and an increase in unemployment”. He also warned these effects could be long-lasting depending on how the situation evolves.
Further replying to a question at the press conference about the supply chain disruption he said, “I mean, we don’t have the kind of tools that are good at dealing with supply chain problems…We don’t have that at all. That’s a job for the administration and for the private sector more than anything.”
In theory, the Fed could lower interest rates to boost demand—but “that would be a very inefficient way to try to fix supply chain problems,” he added.
Real gross domestic product (GDP) of the United States decreased at an annual rate of 0.3 per cent in the first quarter of 2025 (January to March), according to the advance estimate released by the US Bureau of Economic Analysis, while the fourth quarter saw an increase of 2.4 per cent in real GDP.
Compared to the fourth quarter, the downturn in real GDP in the first quarter reflected an upturn in imports and a downturn in consumer and government spending that were partly offset by upturns in investment and exports. Despite the recent decline, many economists expect the economy will return to positive growth in the second quarter.
Employment growth remained positive despite Trump’s efforts to pare down the federal workforce. The nonfarm payrolls increased by 177,000 in April, and the unemployment rate held at 4.2 per cent, giving the Fed room to breathe if it expects a further economic slowdown.
Inflation, one of the biggest concerns of the central bank, has been ticking lower and approaching the Fed’s 2 per cent target, but tariffs are expected to result in at least a one-time rise in prices. However, Trump has pushed the Fed to cut rates as inflation has eased. The central bank’s preferred gauge showed headline inflation at 2.3 per cent, or 2.6 per cent on core that excludes food and energy.
While the economic indicators offer a mixed bag, it all depends on what happens with tariffs.
Powell said there are cases in which it would be appropriate for the Fed to cut rates this year, but there are cases in which it wouldn’t.
“And we just don’t know until we know more about how this is going to settle out and what the economic implications are for employment and for inflation. I couldn’t confidently say that I know what the appropriate path will be,” Powell said at a news conference following the central bank’s latest policy decision.
Although Powell said tariffs won’t change the Fed’s mission to keep unemployment and inflation low, they could complicate it.
On April 02, US President Donald Trump announced steep tariffs on dozens of trading partners, but he later announced a 90-day pause on the levies. Governments from around the world have been trying to strike deals with the United States before the new deadline passes.
According to recent media reports, Washington is close to finalising trade deals with India and Israel. The US administration is also in talks with several other countries, including Japan, South Korea, and Vietnam. Trump has said he wants nations to strike new deals with the US as he tries to radically reshape the global trading system.
The country is also set to start a high-stakes meeting with China in Switzerland this weekend as a rapidly escalating trade war continues to threaten the two largest economies, however both have indicated that the focus will only be on “de-escalation”.
On May 06, The US President has teased what he called a "major trade deal", which would mark the first such agreement to be announced since he imposed tariffs on dozens of America's trading partners.
At a post-meeting press conference, the Fed Chair said, “We are entering a new phase where the administration is entering into beginning talks with a number of our important trading partners, and that has the potential to change the (economic) picture materially or not.”
“The Trump administration is considering nearly 18 trade proposals, and some of them are in advanced stages,” said Treasury Secretary Scott Bessent on May 06.
The US stocks bounced around on May 07 as investors assessed Fed Chair Jerome Powell’s remarks about the outlook for the economy after the central bank held rates steady, matching the market expectations.
As per Bloomberg data, the Dow Jones Futures was up 284.97 points, or 0.7 per cent, after briefly sliding as the decision to hold rates steady was announced. The S&P 500 was up 0.43 per cent after shifting between gains and losses, and the Nasdaq Composite was up 0.27 per cent. The US dollar index, which measures the dollar’s strength against six major foreign currencies, gained 0.39 per cent.
(With inputs from agencies)