Fed holds interest rates steady amid economic uncertainty

The US Federal Reserve announced Wednesday that it will keep its benchmark interest rate unchanged, set at a range of 4.25% to 4.5%, for the third consecutive meeting.

The decision, made by the Federal Open Market Committee (FOMC), reflects the central bank's caution in the face of elevated economic uncertainty, driven by factors such as persistent inflation, trade tariffs and labor market conditions.

The FOMC noted that "[u]ncertainty around the economic outlook has increased further" highlighting an increase in risks to both employment and inflation, the two pillars of its dual mandate.

According to the statement, economic activity continues to expand at a solid pace, with the unemployment rate stabilizing at low levels and the labor market remaining robust. However, inflation remains "somewhat elevated," above the long-term target of 2%.

Fed Chairman Jerome Powell affirmed in later comments that the economy is in a "solid position" despite the uncertainty. He acknowledged that inflation has slowed significantly, but is still slightly above the 2% target.

Powell highlighted the challenges posed by the new administration's policy changes, which include “significantly larger than anticipated” tariff increases, as well as adjustments in trade, immigration, tax policy and regulation.

“If the large increases in tariffs that have been announced are sustained, they're likely to generate a rise in inflation, a slowdown in economic growth and an increase in unemployment," he warned.

Powell explained that "the effects on inflation could be short-lived,” reflecting a one-time change in prices, or more persistent, depending on their magnitude, the length of time they take to pass through to consumers, and the ability to keep long-term inflation expectations anchored.

The Fed, he stressed, has a "obligation" to help stabilize such expectations.

In response to a question about how the Fed would address a stagflation scenario - with high inflation, slow growth and a weak labor market - Powell acknowledged that it would be a "complicated and challenging judgment we would have to make."

He explained that, should the goals of maximum employment and price stability conflict, the Fed would evaluate the distance from each goal, the estimated time to reach them and other relevant factors to make an informed decision. "We're not in this situation,” but we'd look at all those things and make a difficult judgment," he said.

The decision to hold rates follows three previous cuts: one of 50 basis points in September 2024 and two of 25 basis points in November and December 2024.

With inflation and tariffs a focus of concern, the Fed will continue to monitor economic data to calibrate its future monetary policy decisions.