The US Federal Reserve (Fed) kept its policy interest rate at 4.25% to 4.50% after its meeting on May 6-7, defying market expectations that a policy change would occur in the near future. Published meeting minutes revealed that policymakers chose to remain cautious amid economic uncertainty due to sudden changes in global trade policies, especially after President Donald Trump announced drastic new import tariffs.
After Trump's tariff announcement, pressure on financial markets increased, causing bond yields to surge and stock markets to slide. However, the reduction or postponement of some tariffs later eased those concerns. However, the US administration's policy uncertainty still persists, with Trump himself frequently announcing and then withdrawing tariffs on Europe, making the policy environment more uncertain.
Richmond Fed President Tom Barkin likened the situation to “driving in the fog” and acknowledged that the Fed is currently monitoring the various possibilities of whether the tariffs will spur a spike in inflation, or whether this uncertainty will weigh on jobs and slow the economy. Current data still shows inflation moving toward its 2% target and unemployment remaining low, but this conflicting narrative makes it difficult to make clear policy decisions.
The Fed is also reviewing several projections of the impact of the tariffs through internal studies, but their results depend on the final level of the tariffs, which have yet to be finalized. The 90-day moratorium on the highest import duties does not expire until July, and the market is now expecting trade talks to produce lower tariffs. However, the actual impact on the economy will only be seen months later.
As such, investors are expecting no change in interest rates at the June and July meetings, but are assuming a quarter-point rate cut in September and December. Fed Chairman Jerome Powell stressed that the Fed does not yet have a full picture of the true impact on inflation and jobs, so monetary policy is currently on hold while they await more economic data.
