Federal Reserve Holds Key Interest Rate Steady, Ignores Trump’s Hints for Cuts

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The Federal Reserve held the key interest rate steady on Wednesday, keeping the benchmark federal funds rate at 4.25 to 4.5 percent for the third consecutive meeting. The move reflects cautious positioning as policymakers face mixed economic signals, including persistent inflation pressures and growing employment risk linked to President Donald Trump’s sweeping tariff policies.

Fed Chair Jerome Powell cited the high level of uncertainty and emphasized that monetary policy would not shift until economic data provides a clearer picture. While some economists argue the central bank is risking a delayed response to weakening conditions, Powell defended the decision as appropriate under current circumstances.

Steady Rates Reflect Economic Crosscurrents

Unlike Trump’s first term, when the Fed slashed rates aggressively to offset global instability and domestic political shocks, this version of the central bank is signaling restraint. The decision to hold the key interest rate reflects Powell’s acknowledgment that both inflation and unemployment risks are rising, but neither has yet broken the Fed’s tolerance thresholds.

During the first Trump administration, the Fed cut rates from 2.5 percent down to 0.25 percent over a 16-month period, reacting to trade tensions, pandemic fallout, and a general slowdown. In contrast, today’s Fed faces a more complex scenario. Inflation, though off its 2022 peak, still runs above the 2 percent target at 2.6 percent. Unemployment, while low at 4.2 percent, is expected to climb if tariffs continue to disrupt supply chains and dampen corporate hiring.

This time, the central bank is resisting political pressure. Trump has called for lower rates to boost economic activity, but Powell insists the Fed must be guided by data rather than directives. “There is so much uncertainty,” he said. “The right thing to do is wait and see.”

Tariffs and Stagflation Risks Shape Fed Calculus

The rate decision arrives as fears of stagflation re-enter the conversation. Trump’s tariffs, larger and more sweeping than in his first term, have introduced price shocks that complicate the Fed’s dual mandate. If inflation rises while economic growth stalls, the Fed will face conflicting imperatives: either tighten to curb prices or ease to support jobs.

Powell acknowledged the dilemma but refused to commit to a rate path. “We are not in a situation yet where the two mandates are in tension,” he said. “But if we were, we would weigh how far each is from its target and act accordingly.”

Market reactions suggest the Fed’s strategy is understood, if not fully embraced. The S&P 500 closed up 0.43 percent. Treasury yields fell slightly, while the dollar strengthened. Futures markets now predict a 76.8 percent chance of no change at the June meeting, up from 33 percent just a week ago.

No Key Interest Rate Cuts on the Horizon

Unlike in 2018–2019, when the Fed began preemptively cutting to stave off slowdowns, the current committee appears content to pause. That shift in philosophy may stem from lessons learned during the COVID-era inflation spike, when critics argued the Fed waited too long to act.

Some economists fear the reverse will now be true. By prioritizing inflation expectations, the Fed risks missing early signs of a downturn. Consumer spending has already slowed from 4 percent to 1.8 percent annualized. Imports surged in Q1 as firms rushed to beat tariffs, skewing GDP downward. Yet the Fed called the slowdown a data quirk, not a red flag.

Officials at JPMorgan, Nationwide, and Oxford Economics differ on the timing of a rate cut. Most no longer expect movement until September or later. Some, like Capital Economics, believe no cuts will occur until a new Fed chair is appointed next year.

What remains clear is the Fed’s deliberate tone. Powell reiterated the need for “hard” data, not sentiment, to guide action. That posture signals confidence in current policy, even if others see risk in its inertia.

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