The US Federal Reserve opted to keep its key interest rate unchanged on Wednesday, as it awaits further information on the impact of tariffs and other possible disruptions on the economy in the current year.
The Federal Reserve’s policymakers indicated that they continue to anticipate two rate cuts this year, despite their projections that US President Donald Trump’s tariffs will lead to an increase in inflation.
Additionally, they foresee a slowdown in growth and a slight rise in unemployment, as outlined in their most recent quarterly projections published on Wednesday.
Policymakers reduced inflation rates three times towards the end of last year, but have since maintained them. Inflation has been gradually decreasing since January, however, Federal Reserve Board Chairman Jerome Powell mentioned during a news conference that tariffs are expected to negate that progress and elevate inflation in the upcoming months.
The US federal agency anticipates that the increase in inflation will be short-lived, but stressed that addition data is needed before adapting or formulating mid-to-long-term policy.
“Increases in tariffs this year are likely to push up prices and weigh on economic activity,” Powell said. “This is something we know is coming, we just don’t know the size of it.”
Adjustments to the Federal Reserve’s interest rate generally — although not always — affects borrowing costs for mortgages, car loans, credit cards, and business financing.
So far, inflation has continued to decline, although certain weaknesses have emerged within the economy, especially in the housing sector, where high borrowing costs are hindering both sales and homebuilding.
Additionally, hiring has also slowed down. Normally, such trends would prompt the Federal Reserve to lower its key interest rate, which presently stands at around 4.3%.
Yet Powell said the economy remains in good shape and the Fed has to consider the potential for prices to rise soon. “You can see perhaps a very, very slow continued cooling” in the job market, “but nothing that’s troubling at this time,” he said.
“We have to be forward looking,” he added. “We expect a meaningful amount of inflation to arrive in coming months and we have to take that into account.”
Fed officials see inflation, according to their preferred measure, rising to 3% by the end of this year, from 2.1% in April, according to the latest projections released on Wednesday.
They also project the unemployment rate will rise to 4.5%, from 4.2% currently. Growth is expected to slow to just 1.4% this year, down from 2.5% last year.
Trump has referenced modest inflation figures to argue that the Federal Reserve should reduce borrowing costs and has consistently criticised Powell for failing to take such action.
On Wednesday he called Powell “stupid” and accused him of being “political” for not cutting rates.
“So we have a stupid person frankly at the Fed. He probably won’t cut today. Europe had ten cuts and we had none. And I guess he’s a political guy. I don’t know. He’s a political guy who’s not a smart person. But he’s costing the country a fortune,” said Trump.
Trump has previously argued that a reduction in rates would boost the economy. Currently, his attention has turned to the federal government’s borrowing expenses, which have surged since the coronavirus pandemic, with interest payments exceeding an annual rate of $1 trillion (€871 billion).
The US president claims that if interest rates are cut by two and a half percentage points, it would amount to a haircut north of $800 billion (€697 billion) in federal government expenditure.
Additional sources • AP