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The Federal Reserve held US interest rates steady yesterday for the third consecutive meeting, resisting repeated calls to lower borrowing costs from President Donald Trump, who has taken to calling Fed chair Jay Powell “Mr Too Late”.
Policymakers said that “the risks of higher unemployment and higher inflation” had increased since they last met in March and that borrowing costs would have to remain on pause while they assessed how Trump’s aggressive tariff rises would affect the world’s largest economy.
“There’s still way too much uncertainty around what the growth hit will be, what the inflation hit will be and the timing at which this all happens,” said Tom Porcelli, an economist at PGIM Fixed Income.
In a press conference after the announcement, Powell warned that the new trade levies risked putting the central bank in a position where both sides of its dual mandate — to foster maximum employment and to tame inflation — were challenged.
“It’s really not at all clear what it is we should do,” he said.
Economists said that monetary policymakers were facing an increasingly difficult battle figuring out how, and when, to take action.
“The Fed has shifted from engineering a soft landing to keeping the economy from nosediving, even as Trump tries to commandeer the steering wheel,” said Eswar Prasad, a professor at Cornell University.
The Fed’s “data-dependent” approach is also under pressure. Surveys have indicated that businesses and consumers across the US are deeply concerned about how the new trade levies will affect their economic prospects. Nevertheless, recent backward-looking reports have continued to show that demand across the world’s largest economy remained broadly robust at the start of the year.
The rate-setting decision also came hot on the heels of stronger than expected jobs figures for April, which suggested that the labour market remained on a solid footing despite abnormally high levels of uncertainty. The data prompted many economists to push back their expectations of the next US rate cut until at least September.
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Markets are underestimating Trump’s willingness to maintain tariffs on some of the US’s most important trading partners, Dan Ivascyn, chief investment officer at bond fund giant Pimco, has told the Financial Times. [Free to read]
“People still believe that there are going to be off-ramps [to tariffs], and that we are going to get back to something that feels a bit more like it did pre-’liberation day’,” he said. “We’re not so sure.”
Markets were rattled by Trump’s so-called liberation day tariff announcement at the start of April, but appear to have been calmed by his decision to put the levies on hold a week later. By last Friday, the S&P 500 had wiped out the steep losses that followed the tariffs announcement.
But Ivascyn said investors were mistaken in thinking that Trump’s levies would be completely withdrawn or made less forceful than previously announced: “Believe Trump. He believes in tariffs,” he said.
He also warned that the new trade levies could result in “a more ‘stagflationary’ scenario” for the world’s largest economy, warning that the US “very well may have a recession”.
Others, however, are more optimistic. BMW’s chief executive Oliver Zipse predicted on Tuesday that Trump’s 25 per cent tariffs on imports of foreign cars would be lowered from July.
“There are a lot of negotiations behind the scenes. And that leads to the assumption that [the tariffs] are rather temporary,” Zipse said. “We can see that our large footprint there will not be ignored.”
