Washington (AP) – The Federal Reserve kept its key interest unchanged on Wednesday, withdrawing President Donald Trump’s requests to reduce loan costs, and said that the risks of higher unemployment and higher inflation had increased.
The Fed maintained its rate at 4.3% for the third consecutive meeting, after having reduced it three times in a row at the end of last year. Many economists and investors of Wall Street are still expecting the Fed will reduce rates two or three times this year, but the radical prices imposed by Trump injected enormous uncertainty in the American economy and Fed policies.
It is unusual for the Fed to say that the risk of higher price and more unemployment has increased. But economists say that this is the threat created by Trump’s radical prices. Import taxes could both raise inflation by making imported parts and finished finished products, while increasing unemployment by reducing jobs as their costs increase.
Consequently, the prices put the Fed in a difficult situation. The Fed objectives are to maintain stable prices and maximize employment. As a general rule, when inflation increases, the Fed increases rates to slow down loans and expenses and cool inflation, while dismissals increased, this would reduce rates to stimulate more expenses and growth.
During a press conference after the publication of the policy declaration, Powell said on several occasions that the current policy rate puts Fed officials in a good position to “wait and see” what the ultimate impacts of the tariffs are. For the moment, Powell has said, there is too much uncertainty to say how the Fed will react.
“Depending on the way things take place, it might include rate drops, it might include us to hold where we are, we just need to see how things take place before making these decisions,” he said.
Trump announced scanning rates against around 60 American trade partners in April, then paused for 90 days, except for china tasks. The administration submitted goods from China at a rate of 145%. The two parties are expected to hold their first high-level talks since Trump launched his trade war this weekend in Switzerland.
The prudence of the central bank could lead to more conflicts between the Fed and the Trump administration. Trump again urged the Fed again to reduce prices in a television interview and said Powell does not love me because I think he is a stiff total. “
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Inflation not far from the objective of two percent of the Fed for the moment, Trump and the Treasury Secretary Scott Besse are supporting that the Fed could reduce its rate. The Fed pushed it higher in 2022 and 2023 to combat inflation.
Asked at the press conference if Trump calls at lower rates have an influence on the Fed, Powell said: “(IT) does not affect our work at all. We will always consider economic data, perspectives, risk balance, and that’s it. ”
If the Fed should reduce, this could reduce other borrowing costs, such as mortgages, car loans and credit cards, although this is not guaranteed.
Trump also said that he would not hide Powell because the president’s mandate ends next May and that he could then appoint a new president. However, if the economy has stumbled in the coming months, Trump could renew his threats to withdraw Powell.
A big problem with which the Fed is confronted with is how the prices will have an impact on inflation. Almost all the economists and officials of the Fed expect that the taxes on importation increase prices, but this is not clear by how much or for how long. The prices generally lead to a punctual increase in prices, but not necessarily continuous inflation. However, if Trump announces other prices – as he threatened to do on pharmaceuticals, semiconductors and copper – or if the Americans fear that inflation will get worse, this could send higher prices more persistent.
Asked about if the Fed had an opinion on the potential shortages of goods and price increases in a few weeks due to prices, Powell said: “We should not be involved even verbally in the questions on the moment of these things. … In the end, it is for administration. It’s their mandate, not ours. “
Krishna Guha in Evercoreisi said that the Fed assessment of current conditions probably postponed the calendar for a drop in rate. “The combination of bilateral risk assessment and the characterization of the economy as solid suggest that the committee does not seek to put a cup in June at this stage.”
Economists and the Fed look closely at the expectations of inflation, which are essentially a measure of the quantity of consumers who are concerned that inflation is getting worse. Higher inflation expectations can be self-fulfilling because Americans think that prices will increase, they can take measures that increase costs, such as requesting higher wages.
For the moment, the American economy is mainly in good shape and inflation has cooled considerably from its peak in 2022. Consumers spend at a healthy pace, although some of this can reflect things like cars in front of prices. Companies always add workers at a regular rate and unemployment is low.
However, there are signs that inflation will get worse in the coming months. Surveys of manufacturing and services companies show that they see higher prices from their suppliers. And a survey carried out by the Dallas branch of the Federal Reserve revealed that almost 55% of manufacturing companies expect to pass the impact of the rates increased compared to their customers.
“The main thing is that inflation will increase considerably over the next six months,” said Torsten Slok, chief economist of the Apollo group, in an email.
However, prices could also weigh heavily on the economy, especially due to the uncertainty they have created. Trade surveys show that companies refer to investment decisions until they have greater clarity. Many companies have withdrawn their financial forecasts for 2025 due to the uncertainty about prices.
Ryan Sweet, American chief economist at Oxford Economics, said that uncertainty surrounding commercial policy gives him “night terrors”.
“The economy of uncertainty is absolutely sufficient,” said Sweet. “Companies that do not know the rules of the road, their instinctive reaction is to sit on their hands. And that’s what they do. “
But if uncertainty delays hiring, slows the economy and increases the unemployment rate, the Fed could quickly move to interest rate reductions. A net economic slowdown could possibly cool inflation in itself, according to economists.
“If you had the impression that the economy really slowed down, then I think it would probably have priority (above inflation), because generally the way the committee thinks is that will also lead to inflation somewhat with it,” said Jim Bullard, former president of the Branch of St. Louis of the Federal Reserve, and currently dean of the Purdue University Business School.
In March, the Fed pointed out that it could reduce rates twice this year. But then, the Trump administration announcing the main functions in early April, which, according to Powell, was larger and wider than the planned Fed.