The Federal Open Market Committee (FOMC) will announce the central bank’s next decision rate this coming Wednesday, May 7, with expectations of a rate hold at 4.5%.
Traders and investors will be monitoring the FOMC statement and Fed Chair Powell’s comments during the press conference to assess the impacts of President Trump’s aggressive tariff policy on the US economy and how the Fed will move forward.
The Fed has found itself in a tough spot following recent data, reinforcing slower economic growth and higher inflation during the first quarter, a combination that may eventually force the central bank to choose between its dual goals of maximizing employment and maintaining price stability.
Awaiting Economic Data
FOMC officials have stated that interest rates might move lower as the Fed awaits more economic data for confirmation. The reason behind this is because the labor market has remained robust on recent reports and the economy remains strong according to the FOMC.
For example, Fed Chairman Jerome Powell said that the labor market appears to be “in solid condition and broadly in balance.” ⁽¹⁾
Friday’s NFP report showed the economy added 177,000 jobs in April, better than expected. Meanwhile, the unemployment rate kept steady at 4.2%. ⁽²⁾
However, the US economy contracted in Q1 2025 by 0.3%, which marks the first slowdown since Q1 2022. This resulted from a 5% reduction in net exports, a large inventory surplus, and a rise in imports, probably in anticipation of tariffs. ⁽³⁾
Inflation Remains Above Target
Inflation remains above the Fed’s 2% goal. Core PCE data in March rose to 2.6% YoY. Somewhat elevated inflation compared to the FOMC’s 2% annual target is one reason the FOMC is not rushing to cut interest rates. Policymakers also appear more inclined to react to upcoming economic data rather than predict it based on recent statements from officials. ⁽⁴⁾
Elevated Economic Uncertainty and Politics
In addition, economic uncertainty is high. That’s because the economic impact of tariffs has yet to be fully captured in the data and because tariff rates and trade policy continue to evolve.
Jerome Powell mentioned regarding government policies, “Those policies are still evolving, and their effects on the economy remain highly uncertain. As we learn more, we will continue to update our assessment.” ⁽⁵⁾
President Donald Trump said he will not remove Jerome Powell as Federal Reserve Board Chairman before his term ends in May 2026, while repeating calls for the Fed to lower interest rates.
The president continued to send mixed messages on the economy, dismissing concerns about a first-quarter decline in GDP and arguing that his predecessor was to blame for any economic weakness.
What’s Ahead?
The Fed is anticipated to hold rates steady at its May 7 meeting, with a rate cut expected in June. In total, four 25 basis point rate cuts are expected by the end of the year. ⁽⁶⁾
Economists expect Trump’s tariffs, which took effect in April, to push prices up and disturb employment, which would have implications for the Fed’s “dual mandate” to keep a lid on both inflation and unemployment using monetary policy.
However, the most recent data showed that inflation remained steady in March, and the job market remained stable in April. The data was strong enough to allow the Federal Reserve to remain on the sidelines as it monitors the impact of tariffs on inflation and inflation expectations.
