Published on: May 8, 2025
The US Federal Reserve (Fed) has announced that it will maintain its policy rate at its current level, in line with market expectations. This was the central bank’s second meeting since the outbreak of the trade war between the United States and virtually all its trading partners, which has yet to result in any tangible deals.
Despite persistent downward pressure from the Trump administration, the Fed has maintained its policy rate within the 4.25%-4.50% range since December. Stating that uncertainty about the economic outlook has increased further, the bank reckons that the “risks of higher unemployment and higher inflation have risen.”
In a statement, the Federal Open Market Committee (FOMC) acknowledged the economy’s contraction in the first quarter, noting that the data has been affected by tariff-related imports. However, it was also noted that “economic activity has continued to expand at a solid pace” and that the job market remains strong while inflation “remains somewhat elevated.”
The Fed’s decision was not accompanied by an update of the economic projections, which will be provided at the next meeting on June 18th.
At a press briefing, Fed Chair Jerome Powell stated that it was premature to determine the outcome of inflation or growth. He later added that “it’s really not at all clear what it is we should do,” emphasizing the prevailing uncertainty.
Although Mr. Powell said that uncertainty about the economic outlook had risen further, the economy is still resilient in his view, and he believes there is no reason to adjust the policy. Soft data has been weak recently, but some of it has sent out the incorrect signals compared with its hard data counterpart. For example, the ISM non-manufacturing employment index has been below the 50 threshold for several months, including recently, but official data showed the creation of over 150,000 new jobs in the service sector, even in April. This means that, despite greater uncertainty, the US labour market appears to remain resilient overall.
Chair Powell also asserted that “without price stability, the Fed cannot achieve its second mandate,” which is true in the long term. In a recession, which is the most acute and shortest phase of a business cycle, excessive focus on the first mandate (the current distance between inflation and the target) is detrimental to the second (achieving a maximum sustainable level of employment).
A recession leads to disinflation and higher unemployment. In this respect, recent news has been generally positive: recession risks in the US have clearly decreased, as the Trump administration and China are more likely to de-escalate the current tariffs between the two economies.
A de-escalation between China and the USA would reduce the total tariff bill to well below the current level, thereby reducing the risk of recession. Inflation would not rise as much as expected, and consumption growth would remain the main driver of the US cycle.