Update 865: Another Fed Rate Pause

Update 865 – Another Fed Rate Pause;
June Hold Likely Given Tariff Uncertainty

The Federal Reserve hit pause, as expected, on interest rates at the conclusion of its May FOMC meeting this afternoon. While many expected Fed Chair Powell to hint at a coming rate cut at the FOMC’s next meeting in June, he instead emphasized the Fed as being well-positioned for patience in bringing rates down. 

The interest rate decision comes after President Trump’s tariff policy has begun to generate uncertainty among consumers, businesses, and markets that fear inflation will reignite in the coming months, especially due to increased import costs. Powell noted that sustained tariffs are likely to generate a one-off or possibly a sustained rise in inflation, a slowdown in growth, and an increase in unemployment. We cover the decision in detail below. 

Best,

Dana


Federal Reserve Holds Interest Rates Steady

The Federal Reserve announced today that it will hold interest rates steady at the 4.25 to 4.5 percent range, opting to keep rates elevated as the Trump administration’s sweeping economic policy shifts ripple through the economy. The highly expected pause in rate cuts came at the conclusion of the Federal Open Market Committee’s (FOMC) meeting this afternoon. 

At Federal Reserve Chair Jerome Powell’s press conference following the meeting, his comments suggested that the FOMC may be inclined to wait longer to begin cutting interest rates again. Expectations that the Fed would cut rates at the next FOMC meeting in June fell following his remarks that the Fed is well-positioned to wait for greater clarity before considering adjustments to its policy stance.

Powell noted that near-term measures of inflation expectation have moved up as reflected in market and survey measures, with both consumers and businesses mentioning concerns about tariffs. He said that if the large increases in tariffs that have been announced are sustained, this is likely to generate a rise in inflation, a slowdown in growth, and an increase in unemployment. He added that risks of higher unemployment and inflation have risen since the FOMC’s last meeting in March. 

The Fed believes the effect of tariffs on inflation could be short-lived or more persistent. Powell said that avoiding that outcome will depend on the size of tariffs, how long it takes tariffs to pass through fully into prices, and on keeping longer-term expectations well anchored. He noted that beyond the next year or so, most measures of longer-term inflation remain consistent with the Fed’s two percent goal, but that effects on the economy remain highly uncertain.

Pause Comes Amid Shifting Economy, Policy Uncertainty 

The FOMC cut interest rates by a full percentage point over its final three meetings of last year after holding rates at a two-decade high for over a year. The Committee decided to hold rates steady at each of its three meetings so far this year. 

In March, Committee officials projected they would cut the federal funds rate by 50 basis points to the 3.75 to 4.0 percent range by the end of this year, if the economy continued to evolve as they expected. Since then, the Trump administration has implemented sweeping tariffs on foreign-made goods, including a 10 percent universal tariff and a 145 percent tariff on goods imported from China. It has also continued its mass deportations of undocumented immigrants and moved to broadly weaken regulation. Committee officials’ outlook on the economy has likely evolved following these developments, and with it their preferred path for monetary policy. Powell noted that the Fed is monitoring the impact of the administration’s policy changes related to tariffs, immigration, fiscal policy, and regulatory policy.

  • Growth – The Trump administration’s policy agenda has already weakened the American economy. Gross domestic product (GDP) fell by 0.3 percent on an annualized basis in the first quarter of this year as businesses as consumers rushed to stockpile imported purchases ahead of anticipated tariffs. Imports, which function as a subtraction in the calculation of GDP, rose by 41 percent over the first quarter. This a significant reversal from the strong growth seen over the past several years. The economy grew by 2.4 percent on an annualized basis in the fourth quarter of last year and by 2.8 percent over the entirety of 2024. Consumer spending and investment, which have been remarkably strong in recent years, were diminished and are expected to slow in the coming months.
  • Inflation – Tariffs also threaten to disrupt the significant progress made in bringing inflation down over the past two and a half years. The Federal Reserve’s preferred measure of inflation, the personal consumption expenditures (PCE) price index, rose 2.3 percent on an annualized basis in March, nearing the Fed’s two percent target. As tariffs take effect, prices of imported goods across the economy are likely to rise in the coming months as businesses pass increased costs to consumers. 
  • Labor Market – Additionally, the labor market, which has remained strong despite the higher interest rate environment of the last two years, has begun showing signs of weakness. The unemployment rate has remained historically low, staying fairly consistent between 4.0 and 4.2 percent for the past several months, and job gains over the past three months have remained strong at a healthy average of 155,000 jobs being added to the economy each month. However, wage growth has slowed and hiring activity has fallen. Cuts to federal employment pushed by the Department of Government Efficiency (DOGE) have also resulted in thousands of job losses in recent months. As tariffs – and uncertainty around tariff policy – remain high, the labor market could begin to soften later in the year. 

Recession projections have also risen, with JP Morgan increasing the probability of the American economy falling into recession this year to 60 percent, up from a previously estimated 40 percent, citing that American tariff policy could push not only the United States, but the global economy into recession.

Fed Must Hold Its Ground Amid Threats to Independence

With growth weakening, inflation likely to rise, the labor market at risk of weakening, and the risk of recession rising, and the Trump administration’s policy agenda unfolding and remaining subject to change, the Fed faces the challenge of deciding monetary policy within an economy giving mixed signals. Powell noted that the Fed may find itself in a challenging position in which its dual mandate goals are in tension. FOMC officials may prefer to keep rates elevated given their expectation that inflation will rise, but may be cautious of keeping monetary policy tight with growth weakening. He said that if this were to occur, the FOMC would consider how far the economy is from each goal and the prospective time horizons over which those expected gaps would be anticipated to close. Powell has committed to taking a data-dependent approach in which it considers the most recent incoming data before determining their preferred course forward. 

Fed Chair Powell must continue to hold its ground and maintain the independence of its interest rate decisions, rather than give in to pressure from President Trump and his senior administration officials to lower rates quickly. Treasury Secretary Scott Bessent claimed that bond markets are signaling that the Fed should cut rates in an interview last week. It is not inappropriate for administration officials or even presidents to weigh in on monetary policy, but it is inappropriate for them to order monetary policy decisions. Trump has gone further than sharing his view by threatening to fire Powell despite his term continuing into the next year. Last month, Trump said Powell “should have lowered Interest Rates, like the ECB [European Central Bank], long ago, but he should certainly lower them now. Powell’s termination cannot come fast enough!” To be clear, Trump does not have the authority to remove Powell as Chair of the Fed before his term expires in May 2026, and any attempt to do so would be illegal and a violation of long-standing norms. 

It is critical that members of Congress defend the integrity of the FOMC, particularly given that monetary policy can be a key tool in protecting the economy during periods of stress. Senator Elizabeth Warren (D-MA), the lead Democrat on the Senate Committee on Banking, Housing, and Urban Affairs, has defended Powell’s independence despite pushing back against his monetary policy and regulatory decisions at points over his tenure. 

Democrats in Congress must also recognize that President Trump’s trade, immigration, and broader deregulatory agenda pose serious risks, both long- and short-term, to the American economy and stand united in opposing the administration and Republicans’ mass deportation and protectionist policies.

The FOMC meets next to determine the fate of interest rates on June 17 and 18.