The United States Federal Reserve on Wednesday (Thursday AEST) opted to leave its benchmark interest rate unchanged, maintaining a cautious stance amid growing concerns over trade policy impacts.
The central bank held the federal funds rate within a target range of 4.25% to 4.5%, stating that while economic activity has continued to expand at a solid pace, uncertainties have increased.
Although gross domestic product (GDP) growth moderated slightly in the first quarter following 2.5% growth last year, Powell noted that this was largely due to fluctuations in net exports.
“Following growth of 2.5% last year, GDP was reported to have edged down in the first quarter, reflecting swings in net exports that were likely driven by businesses bringing in imports ahead of potential tariffs. This unusual swing complicated GDP measurement last quarter,” Powell noted during a press conference.
The labour market remains strong, with a stable unemployment rate and continued solid conditions.
Inflation, however, remains somewhat elevated, and policymakers are increasingly wary of the downside risks.
“The risks of higher unemployment and higher inflation appear to have risen, and we believe that the current stance of monetary policy leaves us well positioned to respond in a timely way to potential economic developments,” Powell said.
“Surveys of households and businesses, however, report a sharp decline in sentiment and elevated uncertainty about the economic outlook, largely reflecting trade policy concerns. It remains to be seen how these developments might affect future spending and investment.”
Fed Chair Jerome Powell reinforced the central bank’s patient approach, urging patience amid heightened uncertainty.
“The risks of higher unemployment and higher inflation have increased, but they have not materialised,” Powell said.
“The administration is entering into negotiations with many countries over tariffs. We'll know more with each week and month it goes by about where tariffs are going to land.”
The Fed also reaffirmed its commitment to gradually reduce its balance sheet, continuing the drawdown of Treasury securities, agency debt, and mortgage-backed securities.
Despite the Fed’s hold, market participants still anticipate a rate cut later this year. According to the CME FedWatch Tool, traders are pricing in a 59.1% probability of a 25-basis point cut in July.
