Federal Reserve holds rate steady

WASHINGTON – The Federal Reserve is still firmly in wait-and-see mode.

The Fed left its key interest rate unchanged again May 7 and gave no hint it plans to lower it soon as President Donald Trump's sweeping tariffs raise the risks of both another inflation spike and recession. But officials signaled they're growing increasingly concerned about both hazards.

The decision leaves the Fed's benchmark short-term rate at a range of 4.25% to 4.5% for a third straight meeting. The central bank lowered the rate three times late last year, totaling a cut by one percentage point as a pandemic-related price surge eased but has paused since as it gauges the impact of Trump's hefty duties.

"We are comfortable with our policy stance," Federal Reserve Chair Jerome Powell said at a May 7 news conference. "We think right now the appropriate thing to do is to wait and see how things evolve. There's so much uncertainty."

Powell told reporters that Trump calling for rate cuts doesn't affect the Fed's job "at all."

"We are always going to do the same thing, which is, we are going to use our tools to foster maximum employment and price stability for the benefit of the American people," Powell said. "We are always going to consider only the economic data, the outlook, the balance of risks, and that's it. That's all we are going to consider. So it really doesn't affect either our job or the way we do it."

In a statement after a two-day meeting, the Fed gave a nod to the economy's first-quarter contraction, noting tariff-related imports "have affected the data." But it added that "economic activity has continued to expand at a solid pace" and the job market remains "solid" while inflation "remains somewhat elevated." That doesn't sound like a Fed poised to lower rates in the short term.

At the same time, the Fed suggested that both of the risks posed by the import fees have ratcheted higher.

"Uncertainty about the economic outlook has increased further," the Fed said. "The (Fed) is attentive to both sides of its dual mandate and judges that the risks of higher unemployment and higher inflation have risen."

Normally, the Fed raises rates or keeps them high to fight inflation and lowers them to jolt a wobbly economy. But Trump's import taxes augur both sharply higher prices and weak growth or recession as households reduce spending, leaving officials torn between their two mandates.

Powell said the Federal Open Market Committee still feels comfortable waiting to see how tariffs play out before adjusting rates during his news conference.

"We're in the right place to wait and see how things evolve," Powell said. "We don't feel like we need to be in a hurry. We feel like it's appropriate to be patient."

He affirmed, however, that the committee can move quickly if unemployment or inflation changes in a way that calls for a rapid response.

"The economy is – has been – resilient. It's doing fairly well," Powell said. "The costs of waiting to see further are fairly low."

What's next for tariffs?

The Trump administration earlier this year imposed a baseline tariff of 10% for most trading partners and 145% tariffs on Chinese imports.

Treasury Secretary Scott Bessent on May 6 suggested a tariff deal with trading partners could be announced as early as this week, as previously reported by USA TODAY.

"I would be surprised if we don't have more than 80% or 90% of those (trade deals) wrapped up by the end of the year," Bessent said during a hearing with the House subcommittee responsible for turning the Treasury Department's budget proposal into law.

Meanwhile, Trump has threatened additional tariffs on pharmaceuticals and foreign-produced movies. Federal Reserve Chair Jerome Powell has warned tariffs could have adverse effects on the economy.

Powell acknowledged that consumer sentiment has taken a hit from Trump's tariffs, but he said the Fed hasn't seen "big economic effects" in the data yet.

People "are worried now about inflation. They are worried about a shock from the tariffs," Powell said. But "that shock hasn't hit yet. So we are going to be looking at not just the sentiment data, but also the real economic data as we assess what it is we should do."

He added that despite consumer concerns, unemployment is still low, wages are in a good shape and job creation is "fine."

"The economy itself is still in solid shape," Powell said.

Powell said the Trump administration seems to be entering a "new phase" in its tariff plans that includes talks with trade partners.

"I think it's going to be very important how that shakes out," Powell said. "But we simply have to wait and see how it works out. It certainly could change the picture, and we are mindful of not trying to make conclusive judgments about what will happen at a time when the facts are changing."

Trump has not been pleased with the Fed's wait-and-see approach to rate cuts, and in April said Powell's termination "cannot come fast enough."

Legally, Trump would have trouble firing the Fed chair, as previously reported by USA TODAY.

"Our independence is a matter of law. Congress has, in our statute, we're not removable except for cause," Powell said on April 16. "Congress could change that law. But I don't think there's any danger of that. Fed independence has pretty broad support across both political parties and both sides of the Hill."

Trump has since said he had no intention of firing Powell.

Powell was appointed as chair during the first Trump administration and reappointed in 2022 under the Biden administration. His term is set to end May 2026.

How Fed rate works

The Federal Reserve defines the federal funds rate as the interest rate charged by banks to borrow from each other overnight. The Federal Open Market Committee sets a target range for the rate.