The Federal Reserve kept interbank interest rates at a range of 4.25 to 4.5 percent Wednesday amid trade policy fluctuations and pressure from President Trump.
Fed officials stressed the overall health of U.S. economic conditions, which has seen decreasing inflation in recent months along with steady levels of low unemployment.
The unemployment rate has held at 4.2 percent in its past three readings, with about 7 million people out of work in a labor force of 170 million.
Inflation ticked up slightly in May consumer price index (CPI) to a 2.4-percent annual increase from 2.3 percent in April. It declined in its previous three readings from a 3-percent increase in January.
The personal consumption expenditures (PCE) price index, which is the Fed’s preferred inflation gauge, fell to a 2.1-percent increase in April – nearly at the Fed’s target rate of 2 percent.
Many economists and businesses have been warning of higher prices due to President Trump’s tariffs, which have raised the overall U.S. tariff rate to the highest level in nearly 100 years. So far, however, they have yet to show up conclusively in the price data.
End-user import prices were up just 0.2 percent annually in May and have changed little over the past year.
Trade services in the producer price index (PPI), which can show the margin effects of tariffs, were up 0.4 percent in May but were down for apparel, which is a heavily imported consumer good.
Apparel prices overall decreased in May while margins were unchanged, suggesting those importers were eating the cost, according to former Fed economist Claudia Sahm.
“For now, any extra costs of tariffs (not offset by the lower import prices) appear to be absorbed by businesses,” chief economist Claudia Sahm of New Century Advisers wrote in a Wednesday analysis focused on the apparel sector. “Those costs could be passed on later via higher consumer prices, but the apparel gross margins are elevated relative to pre-pandemic levels, which could provide some cushion.”
President Trump has been calling for the Fed to resume its interest rate cuts, which it started in the back half of last year but has paused since January after inflation ticked up over the fall.
Trump went so far as to call Fed Chair Jerome Powell a “numbskull” recently for maintaining his pause, which will increase interest costs on sky-high U.S. debt levels that are likely to be made worse by GOP tax-and-spending cut legislation now making its way through Congress.
However, markets and economists expected the Fed to maintain rates while businesses react to Trump’s tariffs.
“Every one of the 95 forecasts in the consensus expects rates to be unchanged,” UBS economist Paul Donovan wrote in a Wednesday commentary. “U.S. President Trump advocates rate cuts, but this is a distinctly minority view. The trade tax increase is big, and the Fed wants greater certainty about its impact before changing policy.”
Businesses can respond to the tariffs in three main ways — by eating the cost of the taxes, raising prices, or lowering overhead. They can also change their supply chains and production schedules in a way that could impact all three.
Consumer sentiment has languished in the wake of Trump’s trade war. Retail sales took a dive this week, with purchases declining by 0.9 percent in May from April.
Also weighing on the Fed’s decisionmaking has been the prospect of a major war in the Middle East, following comprehensive strikes by Israel on Iran’s nuclear facilities as well as targeted assassinations of Iranian military leaders and scientists.
This has led to a spike in oil prices last week, one of the largest single day movements on record.
Oil prices were up again Monday yesterday, as Brent crude finished the day at its highest level since February at $76.45 per barrel.
“Oil is still below its 2024 average of $80 so we have to put things in perspective from an inflationary angle but it was trading at $58.20 in early May,” analysts for Deutsche Bank wrote in a Wednesday note to investors.
Trump has warned of increasing escalation in the conflict, saying that “the next week is going to be very big.” Iranian leader Ali Khameini’s social media channel posted overnight that “the battle begins.”