MNI: Fed Holds Rates at 4.25-4.5%, Says Economy Still Solid

The Federal Reserve held interest rates steady for a third meeting Wednesday, opting to take a wait-and-see stance as it assesses the effect of gyrating trade policies on the economy’s prospects and the path of inflation.

Uncertainty about the economic outlook has increased further and risks to both sides of the Fed's dual mandate have risen, officials said. But for now, growth remains on solid footing. 

“Although swings in net exports have affected the data, recent indicators suggest that economic has continued to expand at a solid pace," the FOMC said in a statement, adding that "the risks of higher unemployment and higher inflation have risen."

U.S. GDP posted its first negative reading in three years during the first quarter, shrinking 0.3%, but underlying demand held up generally well. The latest employment report showed a stronger-than-expected gain of 177,000 jobs in April while the jobless rate held steady at 4.2%.

The statement repeated that the labor market is "solid" and inflation "somewhat elevated."

Fed Chair Jerome Powell will face questions from reporters on whether he expects the predominant effect from turbulence in global trade to present itself in the form of fresh inflation or primarily as a drag on growth.

In Trump’s first term, the Fed ended up focusing on the hit to growth and cut rates, but at the time inflation was below the Fed’s target. Now, policymakers are worried that inflation expectations could become more easily unanchored following a post-pandemic inflation surge that has taken years to abate.

As of its March meeting, the Fed was forecasting economic growth of 1.7% for 2025, and saw PCE inflation ending the year at 2.7%. But that was before the announcement of a sharp increase in tariffs with global U.S. trading partners, some of which have since been temporarily paused, led to a period of volatility in global financial markets.

Despite the economy’s resilient performance, many market economists have raised the chances of a recession in their projections. Powell’s press briefing could offer clues into how worried he is about a downturn.