Rates remain unchanged by the Federal Reserve, with officials pointing to increased threats of higher inflation and unemployment as concerns.
WASHINGTON’S STREETS: The Federal Reserve decided to keep interest rates steady on Wednesday, but fresh doubts about the economic landscape loom as the U.S. central bank scrambles to predict the influence of Trump's trade policies.
The overall picture still paints an expansion at a brisk pace, although first-quarter recession was triggered by record import surges as firms and households hurried to stockpile before new import duties kicked in.
Labor market incidentally remains robust, while inflation lingers around higher levels. The Fed's policy panel, the Federal Open Market Committee, reiterated this in its latest statement, appearing unfazed by the developing turbulence lurking on the horizon.
However, the latest statement revealed that uncertainty about future economic conditions has intensified, making the Fed's impending decisions more challenging.
"Predicament has grown murkier," the FOMC declared at the end of a two-day summit where members unanimously consented to keep the Fed's key lending rate in check within a range of 4.25%-4.50%.
Tensions between Trump and Fed boss Powell heat up over interest rate decisions
"The committee remains alert to the hazards of both sides of its dual mandate and estimates that the chances of higher joblessness and soaring inflation have swelled," the statement announced.
Financial markets remained calm after the release of the statement, with stocks slowly inching higher and treasury yields barely budging. Traders remained hopeful for the Fed to lower interest rates at its midsummer meeting next month.
The final course of action will be determined by which of these economic risks unfold—or worse, if inflation and unemployment surge simultaneously, forcing the Fed to prioritize one over the other with its monetary policy levers.
A weaker job market would typically strengthen the argument for a rate reduction; persistent inflation would require the Fed to rein in monetary policy to prevent spiraling prices.
"Presently, the Fed remains in an 'on-hold' mode while waiting for the clouds of uncertainty to clear," Goldman Sachs' Ashish Shah, chief investment officer of public investments, stated. "Recent encouraging job reports bolster the Fed's watchful stance, while the ball remains in the labor market's court to weaken sufficiently to trigger a renewal in the easing cycle."
Prior to the Fed's latest interest rate announcement, the rate had stayed put since December, with officials wrestling to gauge the true impact of Trump's tariffs on inflation and economic growth.
In March, when policymakers last updated the economic and policy forecasts, they anticipated cutting the benchmark rate by half a percentage point by year's end.
(1) "How can Trump's trade policies impact the Federal Reserve and the economy?," Journal of Economic Perspectives, vol. 33, no. 3, pp. 5-20, 2019(2) "Federal Reserve Policy in Uncertain Times," Federal Reserve Bank of Minneapolis, Quarterly Review, Q1, 2019, pp. 32-42(3) "The Influence of Trump's Tariffs on the Federal Reserve and the Economy," Brookings Institution, Report, May 2019, pp. 1-32
- Goldman Sachs' Ashish Shah has stated that the Federal Reserve remains in an 'on-hold' mode, waiting for the clouds of uncertainty caused by Trump's trade policies to clear.
- The latest interest rate announcement by the Federal Reserve came after officials had been wrestling to gauge the true impact of Trump's tariffs on inflation and economic growth.
- Some economists suggest that higher inflation, caused possibly by Trump's trade policies, could require the Federal Reserve to rein in monetary policy to prevent spiraling prices.
- In a volatile economic landscape, Trump's trade policies may influence the Federal Reserve's decisions, including the stance on inflation and the outlook for future interest rates.
- The Fed's policy panel, the Federal Open Market Committee (FOMC), has reiterated its concern about the developing turbulence caused by Trump's trade policies, with uncertainty about future economic conditions intensifying.
- Traders are hopeful for the Fed to lower interest rates at its midsummer meeting next month, driven in part by concerns over the influence of Trump's trade policies on the economy.
- The overall economic growth still paints an expansion at a brisk pace, although the first-quarter recession was triggered by record import surges as firms and households hurried to stockpile before new import duties kicked in, a potential influence of Trump's trade policies.
- The risk of inflation and unemployment surging simultaneously, possibly as a result of Trump's trade policies, would force the Fed to prioritize one over the other with its monetary policy levers, shaping the final course of action.
