WASHINGTON (AP) – The Federal Reserve has kept key interest rates unchanged as of Wednesday, responding to President Donald Trump’s request. He noted that this decision has lowered borrowing costs but also escalated risks related to high unemployment and inflation. Such a scenario poses significant challenges for central banks.
The Fed has maintained the rate at 4.3% for the third consecutive meeting following three cuts at the end of the previous year. Numerous economists and Wall Street investors still anticipate potential rate cuts from the Fed this year. The sweeping tariffs enacted by Trump have added remarkable uncertainty surrounding the US economy and central bank policy.
During a press conference after the policy announcement, Chairman Jerome Powell underscored that the decline in tariffs has not yet significantly harmed consumers and employment. However, he acknowledged the current uncertainty makes it challenging to determine how the Fed should fulfill its responsibilities.
“If the announced significant tariff increases remain in effect, they are likely to trigger rising inflation, slower economic growth, and higher unemployment,” Powell commented. He suggested that these effects could be either temporary or more enduring.
“There are numerous unknowns,” he added. “We’re well positioned to observe how things develop.”
AP Audio: The Federal Reserve remains unchanged amid concerns over rising prices and heightened unemployment.
Associated Press Washington correspondent Sagar Meghani reports that the Federal Reserve has not altered key interest rates for the third consecutive meeting.
It is uncommon for the Fed to contend with both elevated prices and the risks of unemployment. Typically, rising inflation occurs when consumers are spending liberally but fail to meet demand, resulting in price hikes akin to what occurred post-pandemic. Conversely, unemployment tends to rise in a slowing economy, which dampens spending and cools inflation.
The simultaneous occurrence of higher unemployment alongside sudden inflation is often termed “stagflation,” a scenario that evokes concern among central bankers due to the complexities involved in addressing both issues. This phenomenon notably persisted during the oil crisis and recession of the 1970s.
However, the majority of economists attribute the current challenges to Trump. The sweeping tariffs present a risk of stagflation, as import taxes can elevate prices by making imported components and finished goods more costly while simultaneously raising unemployment by increasing operational costs for businesses.
The Fed aims to maintain stable prices and maximize employment. Typically, when inflation rises, the Fed will increase rates to curb borrowing and spending, thus cooling inflation. Yet, in times of rising layoffs, rates may be lowered to stimulate spending and foster growth.
Earlier this year, analysts and investors hoped the Fed would cut key rates two or three times as inflation seemed to abate post-pandemic. Some economists believe cuts should be anticipated due to potential slower growth and worsening unemployment created by tariffs. Nevertheless, Powell affirmed that the Fed is capable of remaining patient as the economy appears stable for now.
A few months prior, many analysts were optimistic about a “soft landing” for the economy, where inflation would ideally return to its 2% target while unemployment would decrease amid steady growth.
However, on Wednesday, Powell indicated that such a scenario is unlikely.
“If tariffs are enacted at those levels… we will not see further progress towards our objectives,” Powell stated. “We will not advance towards those goals if that’s how the tariffs unfold.”
Powell also noted that the Fed’s subsequent actions will be influenced partly by which indicators show greater distress: inflation or unemployment.
“Depending on the situation, we might consider rate reductions or decide to maintain our current position. We need to observe how circumstances evolve before making such decisions,” he commented.
EvercoreISI analyst Krishna Guha suggested that the Fed’s current evaluation likely postpones any scheduled rate cuts. “The risk assessments and economic evaluations indicate that the (Fed) is not poised for a cut as of now.” Many economists suspect the Fed may not be ready to cut rates until September.
Trump announced tariffs on 60 US trading partners in April but later suspended most for 90 days, excluding those pertaining to China. The administration has subjected Chinese goods to tariffs of up to 145%. Both parties are slated to engage in high-level discussions for the first time since the trade war was instigated by Trump.
Central bank scrutiny may provoke further discord between the Fed and the Trump administration, as Trump has once again urged the Fed to lower rates during a television interview. Although he has hinted at the possibility of dismissing Powell, he remains uncertain about the economy’s trajectory in the forthcoming months.
When asked in a press conference whether Trump’s call for lower rates would influence the Fed, Powell replied, “(That) does not affect our duties at all. We will always consider economic data, outlook, and risk balance, and that’s what matters.”
If the Fed reduces rates, it could potentially lower other borrowing costs, such as mortgages, car loans, and credit cards, though this is not guaranteed.
The primary concern for the Fed remains how tariffs will impact inflation. Almost all economists and Fed officials predict that import taxes will raise prices, but it remains unclear how long this effect will last. Tariffs typically result in a one-time price increase rather than persistent inflation.
Currently, the US economy appears robust, with inflation having cooled off since its peak in 2022. Consumers are spending at a healthy rate, although some of this might be a result of pre-tariff purchasing. Businesses continue to add workers at a stable pace, and unemployment rates are low.
Yet, there are indications that inflation may worsen in the coming months. Research from manufacturers and service industries reveals that suppliers are raising prices. A survey by the Dallas branch of the Federal Reserve also indicated that nearly 55% of manufacturers expect to pass on the impact of tariffs to their customers.
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Alex Veiga, AP Business Writer in Los Angeles, contributed to this report.
Source: apnews.com