US Fed expected to hold rates steady on May 7 as pressures mount

NEW YORK – Federal Reserve officials are widely expected to leave interest rates unchanged on May 7 as they await clarity on the Trump administration’s trade policies, a move likely to frustrate the President and anyone else seeking answers about the US central bank’s next move.

An aggressive slew of tariffs on imported goods is denting US consumer confidence, with households bracing themselves for a potential spike in consumer prices and a weakening job market. Yet the latest data show US inflation decelerated in March, while the unemployment rate remained steady in April.

Fed officials have stressed in recent public comments that while uncertainty is unusually high, monetary policy is still in a good place to balance their goals of fostering maximum employment and stable prices.

“Hard data is still holding up,” said Ms Sarah House, senior US economist for Wells Fargo. “I think we’ll also hear that uncertainty is high in this environment, and they are ready to act – or not act – as needed to try and meet both sides of their mandate.”

The Fed’s rate decision will be released at 2pm on May 7 in Washington. Chair Jerome Powell will hold a post-meeting press conference 30 minutes later. Investors will listen closely for whether Mr Powell repeats, as he has multiple times, that policymakers are in “no hurry” to adjust rates.

Pricing in futures markets currently points to a quarter-point rate cut at the Fed’s July 29 to 30 meeting, and for two or three more by the end of the year. Economists surveyed by Bloomberg anticipate only two cuts, beginning in September.

In their post-meeting statement, officials are likely to keep their benchmark rate in a range of 4.25 per cent to 4.5 per cent and repeat wording from their March 19 statement saying they are attentive to risks to both sides of their dual mandate. 

Still, Fed officials may again lean into signs of a “solid” labour market to justify their wait-and-see mode, after hiring exceeded expectations in April payrolls and unemployment remained at 4.2 per cent.

Policymakers are also likely to repeat that uncertainty around their economic outlook has increased, or remains high.

With few changes to the statement language and no new set of economic projections at this meeting, investors will quickly turn to Mr Powell’s press conference for clues about his willingness to consider rate cuts – and under what conditions.

Ms Diane Swonk, chief economist at KPMG, stressed that lessons from the Covid-19 pandemic price surge and the inflation shock of the 1970s are “ingrained in the Fed’s DNA”, and so will influence how policymakers respond to tariffs.

Indeed, Mr Powell has said in recent weeks – and could repeat on May 7 – that the central bank must “make certain that a one-time increase in the price level does not become an ongoing inflation problem”.

Amid a major supply shock, “you don’t want to be too quick, or you could create a more pernicious bout of stagflation, and that’s definitely something they don’t want to do after working so hard to get inflation down to the levels it is today”, Ms Swonk said.

The Fed’s favoured gauge of underlying inflation fell to 2.6 per cent in the year through March, down from a 2022 peak of 5.6 per cent but still above the central bank’s 2 per cent target.

Political fire

Mr Powell is also almost certain to face questions about the regular pressure and personal insults being levelled at him by Mr Trump, and possibly about the President’s threats to fire him. Mr Trump has backed away from the latter, repeating in an interview last week that he had no intention of seeking to dismiss the Fed chair. 

But he did call Mr Powell a “total stiff” over the Fed chief’s reluctance to cut rates, piling on the “major loser” barb he launched in April.

Mr Powell will likely seek to avoid any response that antagonises Mr Trump and emphasise the Fed’s independence from elected officials in monetary policy deliberations. BLOOMBERG