The U.S. Federal Reserve is keeping interest rates steady as policymakers try to understand how President Donald Trump’s trade policies, especially tariffs, might affect the economy and inflation. For now, they are cautious, waiting for clearer signs from the data.
“We’re still kind of holding our breath,” said Austan Goolsbee, President of the Federal Reserve Bank of Chicago, during an interview on NPR. “We’ve got a bunch of noise that we’re trying to figure out the through line.”
Inflation Data Sends Mixed Signals
Recent inflation data has done little to help clarify the situation. A key inflation report on Tuesday showed consumer prices rising by only 2.3% in April compared to the same month last year. This is the slowest annual increase in four years and was lower than economists had expected. The slowdown was mainly due to falling food prices.
However, when food and energy prices—both highly volatile—are removed, the “core” inflation rate remained at 2.8%. That figure is unchanged from March and well above the Fed’s long-term inflation target of 2%, suggesting that inflationary pressures remain stronger than the central bank would like.
Goolsbee, who currently serves as a voting member of the Fed’s rate-setting committee, said the numbers suggest that the economy is performing reasonably well. However, he added, “It’s just not realistic to expect businesses or central banks to jump to long-term conclusions when there’s so much short-term variability. That’s a very difficult environment.”
Fed Maintains Current Policy Approach
The Federal Reserve has kept its benchmark short-term interest rate in the 4.25% to 4.50% range at its three meetings this year. Last week, Fed Chair Jerome Powell indicated that there’s no urgency to change that policy.
Other Fed officials have echoed his view. “We have ourselves in a good position to respond to whatever comes right now,” said Mary Daly, President of the San Francisco Fed, speaking to the California Bankers Association. “Patience is the word of the day.”
Tariffs and Trade Policy Create Uncertainty
President Trump’s administration has implemented historically high import tariffs, though some actions have been delayed or partially rolled back. Some goods, such as electronics, have been excluded from new tariffs, while other sectors, including pharmaceuticals, may face new duties.
This back-and-forth approach has made it hard for the Fed to assess how tariffs are affecting inflation, economic growth, and employment.
Despite hearing concerns from businesses and consumers, Daly said there is no clear evidence yet that spending or investment has slowed due to the trade tensions. “If you’re in a highly tourism-driven state like Nevada and especially Las Vegas, you’re getting nervous because international tourism might be coming down,” she said. “You’re worried about the domestic durability when consumers get a little pinched.”
Still, in places like Utah and Alaska, she noted, businesses and banks remain optimistic, pointing to strong pipelines of activity.
“Overall, we’ve got solid growth, a solid labor market, and declining inflation,” Daly concluded. “People feel like the economy is doing fairly well, and it’s just a matter of resolving the uncertainty so we can continue to do very well.”
Economic Growth Concerns Persist
Speaking at a separate event in New York, Fed Vice Chair Philip Jefferson also pointed to a strong labor market. He said that the slight drop in U.S. economic output during the first quarter might have been overstated due to skewed import data, which made the economy appear weaker than it actually was.
Still, Jefferson acknowledged that sentiment among businesses and households has declined. He is watching closely for signs of weakness in more reliable, hard data.
Inflation, he said, might stay firm in the near term. However, the outlook remains uncertain. “If the increases in tariffs announced so far are sustained, they are likely to interrupt progress on disinflation and generate at least a temporary rise in inflation,” he said.
Whether those inflationary pressures become long-lasting will depend on how trade policy evolves, how much price increases are passed on to consumers, how supply chains adjust, and how the overall economy performs.
Markets Expect Fed Rate Cuts Later This Year
Financial markets are currently predicting that the Fed will gain more clarity from economic data by September. At that point, investors expect the central bank to begin cutting interest rates, possibly making one or two reductions before the end of the year.
Until then, the Fed appears ready to wait and watch, balancing steady interest rates with a careful eye on trade developments, inflation trends, and economic momentum.
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