The Federal Reserve confirmed that interest rates will remain unchanged, aligning with expectations. Inflation has eased but is still “somewhat above our 2% longer-run objective,” making a rate cut unlikely for now.
1. Economic Growth & Tariff Uncertainty
First-quarter GDP growth slowed, largely due to businesses “bringing in imports ahead of potential tariffs.” Market sentiment has dropped, with households and businesses reporting elevated uncertainty over trade policy. Higher tariffs could “generate a rise in inflation, a slowdown in growth, and an increase in unemployment.”
2. Labor Market & Inflation Trends
The Fed chair remarked that job gains averaged 155,000 per month, while the unemployment rate held at 4.2%. Wage growth remains steady but has “moderated while still outpacing inflation.” Inflation, though significantly lower than 2022 levels, is still “somewhat elevated,” sitting at 2.6% for core PCE prices over the past year.
3. Future Policy Outlook & Trade Impacts
With major policy shifts in trade, immigration, fiscal strategy, and regulation, the economic effects remain highly uncertain. The Fed acknowledged that “inflationary effects could be short-lived… but could also become more persistent.” Maintaining stability in inflation expectations will be key in shaping future monetary policy.
4. Will the Fed Cut Rates in 2025?
A rate cut remains a possibility later this year, though policymakers are taking a cautious approach. For now, the central bank is “in a good position to wait and see.”
“It’s going to depend. We need to take a step back and see how this evolves.”
If inflation stabilizes and economic risks subside, adjustments may be considered, but the timeline remains unclear. It’s important to remark that Powell has appeared more optimistic about the potential of a rate cut earlier in the year, when he said he expected at least 2 slashes in 2025.
Now, faced with the potential inflationary impact of a trade war, the Fed Chair appears to slowly be shifting his stance to a more preventive perspective.
5. On Trump’s Pressure to Cut Rates
The Fed Chair disregarded any potential influence Trump may have on the Central Bank’s policies: “It really doesn’t affect our job or the way we do it.” Instead, the Chairman emphasized that the Fed remains data-driven, and will continue to use its tools to create the best possible scenario for employment and price stability.
Overall Message: A Wait & See Approach
The most repeated sentence at today’s press conference was that the Federal Reserve is well positioned to just “wait and see” the fallout of the new administration’s policies. “The risks of higher unemployment and higher inflation have risen, but they haven’t materialized yet,” Powell said, signaling that the current stance remains appropriate for now.
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