In spite of significant pressure from the President to lower interest rates, the Federal Reserve has held interest rates at a 4.25% to 4.50% target at its May 2025 meeting..
The Fed is stuck because it sees inceased risks on both sides of its mandate. On one side, the unemployment rate could rise as a result of the administration's tariff and tax policies. On the other, Trump's announced tariffs create a significant risk of higher prices on just about everything that consumers and businesses purchase. Should data begin to indicate lower employment and higher prices, we would experience stagflation and the Fed could be prevented from responding to either side of the dual mandate due to the risks of further damaging the other.
Because of the risks of stagflation and the risk on both sides of its mandate increasing, the Fed's best action for the moment is to be patient and wait and see how the economy evolves with Trump's policies. It is entirely possible that the Fed will remain in this wait-and-hold position as it watches to see how the economy evolves through the end of the year.
The announced tariff policies pose significant risk to the US economy and to higher prices, but for the moment the Personal Consumption Expenditures (PCE) Price Index is at 2.30% and the Core PCE Price Index is at 2.60%. These numbers are just above the Fed's 2% inflation target. It seems as though the Fed would be continuing to lower interest rates right now if we were not dealing with the tariff overhang right now.
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