Fed rate decision May 2025: Fed holds rates steady

The Federal Reserve decided to keep its key interest rate unchanged on Wednesday as it monitors the impact of the Trump administration’s trade policies on the economy. The Federal Open Market Committee maintained the benchmark overnight borrowing rate at a range between 4.25%-4.5%, where it has been since December. The post-meeting statement acknowledged the increased uncertainty in the economic outlook and noted that the risks of higher unemployment and inflation have risen.

Chair Jerome Powell addressed the issue of tariffs during a news conference following the meeting, highlighting the potential impact on the economy. Stocks initially reacted to the rate announcement but ultimately recovered, with the Dow Jones Industrial Average gaining almost 300 points despite concerns over the Fed’s assessment of economic risks.

The statement hinted at a possible stagflationary scenario, where tariffs could lead to both higher inflation and slower economic growth. Policymakers are facing the challenge of balancing full employment and stable prices amidst the ongoing trade negotiations. Powell emphasized that the economy is still in good shape, despite the uncertainties surrounding trade policy.

The White House is currently engaged in negotiations with major trading partners, with tariffs already imposed on U.S. imports. The economy has shown mixed signals, with GDP contracting in the first quarter due to slower spending and increased imports. Job growth remains steady, providing some breathing room for the Fed in case of an economic slowdown.

Inflation has been approaching the Fed’s target of 2%, but the impact of tariffs could lead to temporary price increases. Trump has been pressuring the Fed to cut rates as inflation eases. The committee’s decision to hold rates steady was unanimous, with market expectations of future rate cuts fluctuating based on trade developments.

Overall, the Fed remains cautious as it navigates the uncertainties of trade policy and their potential impact on the economy. The decision to maintain rates reflects a wait-and-see approach as policymakers assess the evolving situation. The market will continue to monitor trade talks and economic indicators for clues on future Fed actions.