Fed Flags Price, Job Risks and Keeps Interest Rate Unchanged

The Federal Reserve’s Federal Open Market Committee held its benchmark rate at 4.25 percent to 4.50 percent on May 7. It paused rates for a third straight meeting.

The committee noted that economic uncertainty has risen and that risks of higher inflation and unemployment have increased.

Policymakers warned about stagflation risk as tariffs could slow growth and push up prices. They highlighted that tariffs threaten to drive up consumer prices while damping growth.

The Fed projects two quarter-point rate cuts this year, bringing its midpoint near 3.75 percent to 4.00 percent by December. The Fed’s dot plot projected a 3.9 percent policy rate at year-end.

The tool indicated nearly 100 percent odds that rates would remain unchanged in May. Markets assign near-zero odds to a May cut and around 75 percent odds to a July reduction.

The Fed holds roughly four percentage points higher rates than early 2024 levels. April nonfarm payrolls rose by 177,000 jobs, and the unemployment rate held at 4.2 percent.

Core inflation remains above the Fed’s 2 percent target, driven partly by trade-related price shocks.

Fed Flags Price, Job Risks and Keeps Interest Rate Unchanged

Durable goods orders jumped more than 10 percent in the first quarter, signalling business resilience. President Trump has publicly urged lower rates, but policymakers resisted political pressure.

The statement pledged to adjust policy as needed and to monitor economic data closely. Fed officials will continue reducing Treasuries and mortgage-backed securities holdings at the current pace.

Fed monitoring of credit conditions will guide future policy moves. Businesses face higher borrowing costs, with credit card rates exceeding 21 percent and mortgage rates near 6.9 percent. Companies plan capital spending around the Fed’s wait-and-see stance.

Global investors interpret the Fed’s caution as a sign to reevaluate portfolio risks amid rising trade tensions. The Fed’s next decision in June will reveal if it keeps its cautious outlook or shifts policy.

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