The Federal Reserve announced it would stand pat, risks of rising unemployment rates and inflation intensifying

After a two-day policy meeting, the Federal Reserve announced on Wednesday that it would maintain the benchmark federal funds rate in the range of 4.25% to 4.5%. This decision was unanimously approved by all members of the Federal Open Market Committee (FOMC), reflecting a "wait-and-see" approach taken by policymakers in the face of increasing economic uncertainty. Federal Reserve Chairman Powell explicitly stated during a press conference after the meeting that the Fed is not in a hurry to adjust interest rates. "We believe we are in a position where we can 'wait and see.' There is no need to rush into action, it is appropriate to remain patient at this time." Tariffs pose triple threat Powell pointed out that the significant tariffs imposed by the Trump administration, if continued, could pose three economic risks, namely rising inflation, economic slowdown, and increasing unemployment. "Tariffs may lead to a one-time increase in prices, but it is also possible that their impact on inflation could be more long-lasting." New language added to the FOMC statement acknowledged, "Uncertainty surrounding the economic outlook continues to increase, risks of rising unemployment and inflation are escalating." While the statement did not directly mention tariffs, it is evident that this policy has become a major variable affecting the monetary policy path. Inflation and employment goals in conflict Currently, the Fed is facing a competition between its "dual mandate" of ensuring price stability and achieving full employment, which may be conflicting. The tariff policy could simultaneously raise commodity prices, weaken business confidence, suppress investment and consumption, thereby posing a risk of "stagflation." Powell stated that there is currently insufficient data to support proactive rate cuts, "We cannot act in advance because we are not sure how to interpret the data, we will only know how to respond after more data is released." Despite uncertain economic growth prospects, the job market remains strong. Nonfarm payrolls increased by 177,000 in April, with the unemployment rate remaining at 4.2%. The FOMC statement stated that the labor market conditions "remain resilient." However, some businesses have paused investment decisions due to uncertainty. Simultaneous GDP decline and consumer spending rebound In the first quarter of 2025, the US Gross Domestic Product (GDP) fell by 0.3%, the first negative growth since 2022. This data was affected by slower consumer and government spending, as well as accelerated imports by businesses before the implementation of tariffs. However, consumer spending rebounded in March, indicating that households tend to consume earlier, and core demand remains resilient. The statement indicated, "While net exports fluctuations affect economic data, recent indicators show economic activity is still expanding at a steady pace." Meanwhile, the Federal Reserve continues to reduce its balance sheet as decided in the March meeting. The monthly reinvestment cap for Treasury securities remains at $5 billion, and for Mortgage-Backed Securities (MBS) it is $35 billion. Market expectations remain divergent, unclear path for rate cuts this year Although the market remains cautious about rate cuts, there is a significant divergence in expectations for the policy direction in the coming months. Before this meeting, the market had hardly bet on a rate cut in May, with less than 30% probability for June rate cut. Currently, traders expect the Fed to cut rates three times this year, but this forecast may be adjusted at any time based on trade negotiations progress and economic data. Chief Investment Officer of Northlight Asset Management, Chris Zaccarelli, stated that the Fed is facing a dilemma, as concerns about inflation and economic recession are pulling them in two directions. Because of this, the Fed will have to wait for unemployment to rise before they can resume rate cuts, but by then it may be too late. The market will become increasingly worried about an economic recession, unless some trade agreements are reached before the tariff pause ends, we will see the market declining again, as it did in early April.