Fed holds rates steady but warns of downside risks

Washington — The Federal Reserve held interest rates steady on Wednesday but said the risks of higher inflation and unemployment had risen, further clouding the economic outlook as the US central bank grapples with the impact of the Trump administration’s tariff policies.

The economy overall has “continued to expand at a solid pace”, the Fed said in a policy statement, attributing a drop in first-quarter output to record imports as businesses and households rushed to buy before new import taxes.

The labour market also remained “solid” and inflation was still “somewhat elevated”, the central bank's policy-setting federal open market committee (FOMC) said, repeating the language used in its previous statement.

But the latest statement highlighted developing risks that could leave the Fed with difficult choices in coming months.

“Uncertainty about the economic outlook has increased further,” the FOMC said at the end of a two-day meeting during which officials agreed unanimously to keep the central bank’s benchmark interest rate steady in the 4.25%-4.5% range.

“The committee is attentive to the risks to both sides of its dual mandate and judges that the risks of higher unemployment and higher inflation have risen,” the statement said.

The direction of policy will depend on which of those risks develop or, in the more difficult outcome, whether inflation and unemployment increase together and force the Fed to choose which risk is more important to try to offset with monetary policy.

A weaker job market would typically strengthen the case for rate cuts; higher inflation would call for monetary policy to remain tight.

The Fed’s policy rate has been unchanged since December as officials struggle to estimate the impact of President Donald Trump’s swingeing import tariffs, which have raised the prospect of higher inflation and slower economic growth this year.

Federal Reserve chair Jerome Powell acknowledged on Wednesday uncertainty is affecting economic decisions while again affirming the economy is still in a good place.

“It’s still a healthy economy, albeit one that is shrouded in some very downbeat sentiment on the part of people and businesses,” he said during a press conference after the FOMC meeting. 

When policymakers last updated their economic and policy projections in March, they anticipated reducing the benchmark rate by half a percentage point by the end of the year.

Reuters