Fed keeps Interest Rate Unchanged
On May 7 (US time), the US Federal Reserve (Fed) decided to keep the basic interest rate unchanged at a range of 4.25% - 4.50%, but at the same time warned of increasing risks of inflation and unemployment, in the context of the US economic outlook becoming gloomy due to the impact of President Donald Trump's tax policy.
Fed Chairman Jerome Powell admitted that it is not yet possible to determine whether the US economy will continue to grow steadily or stagnate due to increased instability and the risk of inflation outbreak in the coming time.
"The impact of tariff policies is still unpredictable in terms of scale, timing and extent of spread," Powell said at a press conference after a two-day policy meeting, "Therefore, it is not yet possible to confirm what is the appropriate response to monetary policy at this time. We really cant be sure what to do.
Mr. Powell hinted that the Fed as the monetary policy officer is in a passive position, awaiting full impacts from the Trump administrations economic policies.
In a policy statement, the Fed said that since its last meeting in March, "uncertainties about the economic outlook have increased", while warning of the risk of inflation and unemployment increasing in the coming time.
Thomas Simons, chief economist at Jefferies, said the Fed's statement had mitigated the chaos in the situation. He said a series of tariff news, from the 90-day delay of tax rates on April 9 to conflicting information about trade deals, has made business and consumer surveys negative, making economic outlook predictions almost impossible.
"In such a situation, Mr. Powell is forced to exercise caution and not commit to any direction," Mr. Simons commented.
Risks with two policy goals
However, the Fed still reserves its assessment that the US economy continues to show good resilience, with a solid labor market and growth remaining at a "stable" level. Mr. Powell explained that GDP growth in the first quarter decreased mainly due to the sudden increase in import waves a backup move against import tax policies while domestic demand still showed signs of expanding.
However, this is what highlights the Fed's awkward position. The fact that businesses and households rush to buy goods before taxes is only a temporary phenomenon. It is unclear whether demand and investment are weakening behind the scenes and how that will be reflected in the hard inflation and employment indicators.
The Fed's recent Beige Book report also recorded a gloomy situation: Many deals were stalled, demand declined, prices escalated. "Enterprises and people are concerned... and delay economic decisions," Mr. Powell said. If this continues, it will certainly be reflected in economic data soon.
However, the Fed cannot react until there are clear signs of the economic movement trend and the level of impact on two goals: controlling inflation around 2% and maintaining full-time labor.
Current monetary policy gives us a good position to respond promptly if there are unexpected developments, Mr. Powell emphasized the wait and see stance the line that has characterized the Fed in the first months of Mr. Trumps term.
The US stock market increased after the Fed's announcement, while Treasury bond yields decreased. The USD appreciates against a basket of major currencies.
Waiting for clarification
The Fed's next move will depend on which risks are there: unemployment or inflation. In the more difficult scenario - both increasing - the Fed will be forced to choose between the two risks to adjust policy.
If the labor market weakens, the possibility of interest rate cuts will be taken into account. Conversely, if inflation rises, the Fed may maintain a tighter monetary policy.
"Currently, the Fed is still in a 'frozen' state, waiting for the uncertainties to be resolved," said Mr. Ashish Shah, Investment Director of Goldman Sachs Asset Management. He said that recent positive employment data is a factor supporting the Fed to maintain the view of keeping interest rates unchanged, and only when the labor market is truly weak can the easing cycle resume.
Since December 2024, the Fed has not adjusted interest rates, due to not being able to fully assess the impact of the Trump administration's tax policy - which is expected to put pressure on increased inflation and slow down growth.
In its March forecast, the Fed expected a total of 0.5 percentage point cut in 2025. However, with the current situation, all scenarios are still open.
