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US Fed holds rate, awaits 'clarity' on tariffs: Update

US Fed holds rate, awaits 'clarity' on tariffs: Update

Adds Powell comments, CME, GDP data. Houston, 7 May (Argus) — US Federal Reserve policymakers kept their target interest rate flat today for a third time this year, noting that economic "uncertainty" has increased, while signaling they would continue to monitor the impacts of the new US administration's policies before adjusting monetary policy. The Fed's Federal Open Market Committee (FOMC) held the federal funds rate unchanged at 4.25-4.50pc. The Fed has held the target rate unchanged this year after three rate cuts late last year lowered the target rate by 100 basis points from a two-decade high of 5.25-5.5pc after the Fed sharply hiked rates from near zero to battle inflation that topped 9pc in 2022 during the overheated recovery from the Covid-19 slump. "If the large increases in tariffs that have been announced are sustained, they are likely to generate a rise in inflation, a slowdown in economic growth, and an increase in unemployment," Fed chair Jerome Powell told reporters after the decision. "All of these policies are still evolving however, and their effects on the economy remain highly uncertain." Powell also noted that "we are entering a new phase where the administration is entering into beginning talks with a number of our important trading partners and that has the potential to change the picture materially." US economic growth contracted by an annual 0.3pc in the first quarter of 2025 following 2.4pc growth in the fourth quarter. It was the first quarter of negative growth in three years and raised concerns that the US may be entering a recession amid a raft of poor consumer and business confidence surveys. But Powell pointed out that the driver of the first-quarter contraction was a "distortion" caused by a spike in imports, which subtracts from GDP growth, as businesses stocked up on inventory from abroad to get ahead of the tariff impacts. Overall, he said, "the economy is growing at a solid pace, the labor market appears to be solid. Inflation is running a bit above 2pc. So it's an economy that's been resilient and in good shape." The Fed earlier penciled in two likely quarter point rate cuts this year, but the administration of President Donald Trump's chaotic rolling out of tariff and federal spending policies has continued to push back the likelihood of cuts to the federal funds rate, as measured by the CME's FedWatch tool, to the back half of the year. FedWatch, after Wednesday's decision, sees a 23.3pc probability of a quarter point cut at the June Fed meeting, down from 30.5pc Tuesday. Odds of a quarter point cut in July were little changed at 57pc from the prior day. "Ultimately we think our policy rate is in a good place to stay as we await further clarity on tariffs and ultimately their implications for the economy," Powell said. By Bob Willis Send comments and request more information at feedback@argusmedia.com Copyright © 2025. Argus Media group . All rights reserved.