The US Federal Reserve (Fed) kept interest rates unchanged at its May meeting, warning of rising inflation and unemployment risks.
On May 7, after a two-day policy meeting, the US Federal Reserve (Fed) decided to keep its benchmark interest rate unchanged at 4.25-4.50%. This level has been maintained since the end of last year.
"The economy continues to grow solidly overall," the Fed said. The agency said that the first-quarter GDP decreased because businesses and households increased imports to avoid new tariffs. The Fed also assessed that the labor market remained strong and inflation was "high," repeating phrases from previous statements.
However, this statement emphasized that new risks are emerging, which may force them to make difficult choices shortly. "The economic outlook has become increasingly uncertain. The Federal Open Market Committee (FOMC) is monitoring the situation closely. It assesses that the risks to inflation and unemployment are rising," the statement said.
At a press conference later, Fed Chairman Jerome Powell said: "Despite increased uncertainty, the economy is in a strong position." He stressed the need for monetary policy to be flexible and affirmed that "the current policy stance allows the Fed to respond promptly to economic developments."
Powell also reiterated that trade policy continues to be a factor of uncertainty, requiring the Fed to wait and watch. "I don't think we can say what the outcome will be. There are too many uncertainties here, for example, where the import tariff policy will go," he said.
The next direction of policy will depend on which of the two risks - unemployment and inflation - materialises. If both rise, the Fed will have to choose a priority. Accordingly, if the labor market weakens, the agency will have a basis to cut interest rates. Conversely, if inflation accelerates, they will have to maintain monetary tightening.
"For now, the Fed is still waiting for a clearer signal before acting," said Ashish Shah, head of public investments at Goldman Sachs Asset Management. "Recent better-than-expected jobs data has reinforced the Fed's stance of keeping interest rates unchanged, and easing will only happen if the labor market weakens enough," he predicted.
The Fed has kept interest rates unchanged since December 2024. Officials have struggled to estimate the impact of US President Donald Trump's import tariffs. Mr. Trump's trade policies are expected to accelerate inflation and drag down growth this year. In its most recent policy update in March, Fed officials projected a total of 50 basis points (0.5%) in rate cuts in 2025.
The Fed's decision could prompt Trump to continue to push the agency to cut rates. The US president has repeatedly made this call in recent months. The most recent was on May 2, after the US Department of Labor released a better-than-expected April jobs report. Analysts believe Trump wants to lower rates to mitigate the impact of import tariffs. However, Powell is reluctant to cut rates early, fearing inflation will flare up.
(via Reuters)