Federal Reserve Chair Jerome Powell made it clear that he would not rush to lower borrowing costs until the direction of trade policy becomes more certain, and that direction must come from the White House.
Powell and his colleagues kept interest rates steady on Wednesday and said at their first meeting since President Donald Trump announced a full-scale tariff war last month that the risks of rising inflation and unemployment have increased.
Powell said that this situation will force policymakers to make a tough choice: whether to lower borrowing costs to support the job market or to maintain high levels to curb price pressures. Meanwhile, he said that the uncertainty over the scope and scale of tariffs and the outcome of the upcoming trade negotiations will cause policymakers to temporarily put aside policy.
“Without a decisive turn in US economic data, the Federal Open Market Committee (FOMC) seems willing to keep interest rates unchanged indefinitely,” said James Egelhoff, chief US economist at BNP Paribas, referring to the FOMC. “The FOMC is waiting for the final conclusion: whether the next move is to cut rates due to an economic downturn or to adopt a stricter policy because of deeply entrenched high inflation in the economy.”
The rate-setting committee unanimously voted to keep the benchmark federal funds rate within the range of 4.25% to 4.5%, as it has been since December.
On April 2nd, Trump announced a series of tariffs that exceeded expectations, but then suspended some of the tariffs for 90 days. Currently, the total tariff rate on Chinese imports has reached 145%. The capriciousness of tariffs, coupled with the unclear ultimate direction of trade policies, has triggered uncertainty throughout the entire economic sector.
Although the tax matters are still under negotiation, economists generally expect that the expansion of tariffs will push up prices and drag down economic growth.
Powell was harshly criticized by Trump for not cutting interest rates. In repeated communications with reporters, the Fed chair emphasized that the White House is better equipped to deal with the growing risks and uncertainties and seems to be moving in that direction. US and Chinese officials will meet in Switzerland later this week to discuss tariffs.
“It’s ultimately up to the government to do that. That’s their responsibility, not ours,” Powell said. “It seems we are entering a new phase where the government is starting to negotiate with some of our key trading partners, which could bring about substantial changes.”
Concerns over a U.S. economic recession have intensified, with some companies reporting that they have put investment decisions on hold due to uncertainty. Despite this, the labor market remains resilient, with 177,000 new jobs added in April. Federal Reserve officials stated in their statement that labor market conditions were “solid”.
Powell acknowledged that under the capricious tariff announcements, consumer and business confidence has become depressed, but he said that hard data still depicts a healthy economic picture.
Claudia Sahm, chief economist at New Century Advisors, said, “Overall, I think when we look at the Federal Reserve, their aura as the ‘masters of the universe’ has weakened significantly. The Fed is largely influenced by the policies of the White House. They are reactive.”
Economists say it will take time for the full impact of the new tariffs to be reflected in the economy. So far, the effects have mainly included a sharp decline in market sentiment and a surge in imports. The US economy shrank in the first quarter for the first time since 2022, but a gauge of underlying demand remained firm.
The futures market indicates that investors still expect the Federal Reserve to cut interest rates around three times this year, with a probability of about 85% for the first cut as early as July. Most economists and investors do not expect the Fed to cut rates at its next meeting in June.
“You won’t get truly informative data until June,” said Ellen Meade, a Duke University economics research professor and former special advisor to the Federal Reserve Board. “The earliest might be July, but frankly, I think it’s September, and I don’t even believe they will cut interest rates.”