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Fed Takes Break

U.S. Federal Reserve Keeps Rate steady at 4.25-4.5%, Holding Off on Easing Due to Uncertainty on Trump's Trade Policy. Despite the Q1 US GDP contraction and March's Consumer Price Index drop, the Fed opted against resuming monetary easing following the May meeting. Experts predict the Fed won't...

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Federal Reserve maintains interest rate at 4.25-4.5% post May meeting, largely influenced by Donald...
Federal Reserve maintains interest rate at 4.25-4.5% post May meeting, largely influenced by Donald Trump's trade policy uncertainties. The steady rate, contrary to expectations for monetary policy easing, was not influenced by the first quarter U.S. GDP decline or the March consumer price index drop. Experts predict the Federal Reserve may not revert to rate cuts until at least July.

The Current Monetary Standoff: FRB's 4-4.5% Interest Rate Stance

Fed Takes Break

In a surprising turn of events, the Federal Reserve System (FRB) has kept the federal funds rate locked at 4.25-4.5% following their May meeting this year. This decision, driven by uncertainty surrounding economic policies, has been widely anticipated by analysts and economists alike.

While the U.S. economy has experienced a minor contraction in GDP during the first quarter and a decline in consumer prices in March, it hasn't been enough to persuade the FRB to reconsider its monetary easing policy. The Fed seems to be holding on to its cautious stance, hinting at a possible return to rate cuts not before July.

Interestingly, the Fed's key rate has remained within the range set since December 2024, following a pause after consecutive rate cuts that were predominantly prompted by the risks associated with new economic policies. As the new policies began to take shape, the FRB has chosen to maintain a conservative approach, both in rhetoric and action.

Inflation figures, despite showing a slight slowdown in March, remain "somewhat elevated" according to the FRB, with prices increasing by 2.4%. However, the personal consumption expenditures (PCE) deflator, a more sensitive indicator, dropped to 2.3%, while the core PCE, excluding food and energy, slipped to 2.6%.

Forecasts predict that inflation could accelerate in the coming months, with both imported and domestically produced goods becoming more expensive. The FRB anticipates inflation to reach 2.7% in 2025, up from its previous forecast of 2.5%. With inflation expectations continuing to climb, reaching 6.5% in April (the highest level since 1981), it seems that the trade restrictions have had a significant impact. The FRB expects inflation expectations to align with their target of 2% only by the following year.

The labor market remains resilient, with the job growth slowing slightly in April, although the unemployment rate remained steady at 4.2%. Despite trade restrictions posing increased risks not only to inflation but also to unemployment growth, the Fed remains optimistic about the expansion of business activity, despite the first-quarter GDP decline.

Key economic indicators, such as the composite PMI, the industrial PMI, and the services indicator, have shown a noticeable decrease in April. However, the market remains skeptical and doesn't expect the Fed to ease policy before July. Analysts predict that the Fed will reduce interest rates by about 75 basis points by the end of the year, while Citigroup suggests that if economic conditions worsen, rate cuts could reach up to 125 basis points in 2025.

Jerome Powell, the FRB Chairman, has stated that the regulator has no plans to rush into easing monetary policy and will respond as necessary to emerging risks that could potentially derail the economic goals.

[Enrichment Data:]

  • Historical Context: The FRB's current target range for the federal funds rate is the highest since 2019.
  • Interest on Reserves: The interest rate paid on reserve balances was last adjusted in May 2025, to 4.4%.
  • Quantitative Tightening: The Fed has continued to reduce its holdings of Treasury securities and agency debt, a process known as quantitative tightening.
  1. The Federal Reserve System (FRB) has confirmed that they will not resume rate cuts before July, despite inflation figures showing a slight slowdown in March to 2.4%.
  2. The FRB's restrained stance on monetary policy, despite a sensitive economic environment, has been driven by the current standoff in economic policies and the fear of repercussions on the finance sector and business.
  3. Analysts predict that inflation could accelerate in the coming months, affecting a wide range of goods, which is a concern for the FRB, as it could lead to a sensitive increase in consumer prices.
  4. Despite the FRB's cautious approach, analysts expect a reduction in interest rates by about 75 basis points by the end of the year, with Citigroup suggesting even more significant rate cuts if economic conditions worsen.

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