Fed Holds Rates Steady Citing Tariff Risks

The U.S. Federal Reserve left its benchmark interest rate unchanged at 4.25%–4.5% during the May 7 FOMC meeting, which aligned with analyst expectations. 

Fed Chair Jerome Powell expressed concern that heightened tariffs could complicate efforts to meet the central bank’s inflation and financial stability targets.

Bitcoin, which often swings on FOMC commentary, saw renewed volatility after the announcement but has since rebounded, approaching the $100,000 mark.

Key Takeaways from the Fed Meeting

In a press conference following the FOMC meeting, officials reaffirmed their intention to keep interest rates steady. The Fed’s statement noted that, despite recent fluctuations in trade data, economic activity continues to expand at a solid pace, supported by low unemployment and moderately elevated inflation.

Moreover, Jerome Powell noted that inflation has eased significantly from its peak in mid-2022 but remains above the Fed’s long-run target of 2%. He also said the current policy stance gives the central bank room to respond swiftly to emerging economic challenges.

Tariff Effects on the Economy and Markets

The Federal Open Market Committee also flagged concerns over U.S. trade policy.

If the large increases in tariffs that have been announced are sustained, they are likely to generate a rise in inflation, a slowdown in economic growth, and an increase in unemployment,

Jerome Powell said

Additionally, he noted that the uncertainty surrounding the scale and duration of the proposed tariffs makes it harder to forecast the path of inflation and labor market conditions. As a result, the Fed is likely to hold off on any decision to raise or cut rates until more data becomes available.

You might also like: Arthur Hayes Challenges Fed Independence in His New Essay “The BBC”

Federal Reserve’s Policy Toolkit

The Committee also reaffirmed its commitment to quantitative tightening (QT), continuing the reduction of assets held on the Fed’s balance sheet. At its March meeting, the FOMC approved lowering the monthly redemption cap on Treasury securities to $5 billion and set a $35 billion cap for agency debt and agency mortgage-backed securities.

It’s not a situation where we can be preemptive, because we actually don’t know what the right responses to the data will be until we see more data,

Jerome Powell said

The approach allows policymakers to remain flexible and data-dependent as they assess next steps. 

The Fed’s next interest rate decision is scheduled for June 18.

Related: Trump Administration to Launch Fed Chair Search in Fall 2025