Washington
CNN
On Wednesday, the Federal Reserve announced it would hold interest rates steady as signs of economic impact from President Trump’s unintended trade conflicts emerge.
The central bank has maintained its approach since January, keeping its benchmark rates between 4.25% and 4.5%.
Officials indicated a cautious stance is best as they await clearer data on how the US economy responds to Trump’s major policy shifts. In their latest statement, the Fed noted a rise in “higher unemployment and higher inflation risks.”
At a recent press conference, Chairman Jerome Powell highlighted the pervasive uncertainty around policy directions and economic conditions affected by ongoing trade tensions with various countries. He expressed concerns about stagflation but noted the labor market remains a bright spot.
The tariffs imposed by Trump have begun to impact economic growth, with Powell pointing to a spike in imports as consumers rushed to avoid the tariffs. The US experienced its first quarterly decline in economic output since 2022 as imports surged, leading to a widening trade deficit that detracts from GDP.
Nevertheless, the economy hasn’t completely collapsed. As of April, the unemployment rate was stable at 4.2%, and the latest GDP report indicated a healthy addition of 177,000 jobs in the first quarter, suggesting strong demand.
It seems the economy might need support from further interest rate cuts to maintain momentum. Despite the uptick in imports affecting GDP, Fed officials remarked that “economic activity continues to expand at a steady pace.”
However, various sentiment surveys indicate businesses are troubled by the uncertainty stemming from Trump’s policies, leading to doubts about the economy’s resilience. This uncertainty impacts hiring plans and makes consumers hesitant, which ultimately stifles business investment. Additionally, the direct cost of tariffs is pushing consumer prices up, affecting those already managing prolonged inflation.
Overall, the current economic indicators don’t provide clear guidance for the Fed. This is one reason Fed officials are engaging in careful deliberation. Most economists seem to agree there is a risk of stagflation.
Powell refrained from directly discussing Trump or his recent comments.
Concerns about stagflation, which troubled the Fed in previous decades, may resurface due to Trump’s tariffs.
Powell acknowledged the possibility when questioned by reporters, though he indicated the Fed’s response to the repercussions of Trump’s tariffs would hinge on various factors, including whether current inflation spikes are temporary.
He outlined the Fed’s approach to dealing with a stagflation scenario, suggesting that if faced with conflicting goals, they would examine each issue and the timeline for expected improvements.
The Fed might need to make tough decisions on which issue to address first. In past stagflation situations, under Paul Volcker’s leadership, the Fed opted to combat inflation, even if it meant enduring a prolonged recession. This approach did succeed in curbing persistent inflation back then.
When pressed on which aspect of the Fed’s dual mandate to prioritize, Powell said, “It’s too early to know that.”
“Ultimately, I believe our policy rate is appropriately positioned as we await greater clarity regarding tariffs and their overall impact,” he added.
When asked how a weakening labor market would prompt Fed action, Powell emphasized the importance of monitoring vast labor market data while also considering other factors as they gauge whether conditions are indeed deteriorating.
“Suppose unemployment rose in an unpleasant way. It’s not just inflation,” Powell noted. “We need to assess how far they are from their targets and when they are expected to return to those goals.”
Yet, some economists contend that the Fed will act quickly if job market signs weaken, recalling its decisive half-point rate cut last year following a steady climb in unemployment.
Powell pointed out that the tariff landscape is ever-changing, suggesting that the Fed’s economic outlook could shift in response, especially if the administration intensifies its trade negotiations.
“We are entering a new phase, with the administration beginning discussions with key trading partners, which could significantly alter the economic landscape,” he remarked.
Powell on labor market resilience and American pessimism
Powell stressed the robustness of the labor market, which has provided reassurance to central bankers and kept many data indicators stable.
“Labor market conditions are generally balanced and aligned with high job counts,” he said, noting that the stable job market hasn’t exerted upward pressure on prices.
This observation holds across multiple metrics, such as strong employment growth and relatively low unemployment rates. While new unemployment claims remain low, continued claims have recently reached the highest levels since 2021.
Nevertheless, Powell indicated that consumer sentiment has deteriorated over recent months amidst the trade war.
While acknowledging the negative economic atmosphere in America, he clarified that this negativity hasn’t yet translated into significant changes in hard economic data. The GDP decline in the first quarter was not mainly due to a dramatic drop in consumer spending; rather, it reflected a more moderate pace of spending.
Still, Powell warned that ongoing pessimism could pose risks to the economy, also noting, “It’s unclear what the appropriate financial policy response should be right now, as the timing, scale, and duration of effects remain unpredictable.”
“The economy is still quite healthy, but public sentiment has taken a hit, leading to deep emotions among individuals and businesses,” he concluded.
