US Fed rules out pre-emptive rate cut while flagging tariff risks to inflation, jobs

WASHINGTON - US Federal Reserve chairman Jerome Powell has ruled out pre-emptive rate cuts as inflation is still running above target, while adding that tariffs could lead to higher inflation and unemployment. 

“If the large increases in tariffs that have been announced are sustained, they’re likely to generate a rise in inflation, a slowdown in economic growth and an increase in unemployment,” Mr Powell said on May 7 at the conclusion of a two-day rate-setting meeting. 

“The effects on inflation could be short-lived, reflecting a one-time shift in the price level,” he said. But it is “also possible that the inflationary effects could instead be more persistent”.

Mr Powell and his colleagues are determined to keep tariffs from sparking a lasting rise in inflation, and several officials have signalled they would not support lowering interest rates pre-emptively to protect against a slowing economy. 

“It’s not a situation where we can be pre-emptive, because we actually don’t know what the right response to the data will be until we see more data,” Mr Powell said on May 7.

“We think we’re in the right place to wait and see how things evolve,” he added. “We don’t feel like we need to be in a hurry. We feel like it’s appropriate to be patient.”

Officials voted unanimously to keep the benchmark federal funds rate in a range of 4.25 per cent to 4.5 per cent, where it has been since December.

“Uncertainty about the economic outlook has increased further,” the Federal Open Market Committee said in a statement. It added: “The risks of higher unemployment and higher inflation have risen.”

US President Donald Trump’s trade policy has unleashed a wave of uncertainty across the economy. While the levies are still being negotiated, economists widely expect the expansive tariffs to boost inflation and weigh on growth. That would pit policymakers’ two goals – price stability and maximum employment – against each other.

The US President introduced

steep 145 per cent tariffs in April on China,

and lower “baseline” levies of 10 per cent on goods from most other countries, sparking weeks of turbulence in the financial markets.

The White House also imposed higher tariffs on dozens of other trading partners, and then abruptly paused them until July to give the US time to renegotiate existing trade arrangements.

Data published in recent weeks points to an economic contraction in the first quarter of 2025, while the unemployment rate has hovered close to historic lows, and the inflation rate has trended towards the Fed’s long-term target of 2 per cent.

Economic picture

Recession concerns have grown, and some businesses have reported pausing investment decisions given the uncertainty. Still, the labour market remains resilient, with employers adding 177,000 jobs in April. 

Economists say it will take time for the full effect of the new tariffs to work through the economy. So far, the impact has mainly included a sharp decline in sentiment and a surge in imports. The US economy contracted at the start of 2025 for the first time since 2022, but a gauge of underlying demand stayed firm. 

“Although swings in net exports have affected the data, recent indicators suggest that economic activity has continued to expand at a solid pace,” the Fed statement said.

Companies scrambled in the first quarter to import merchandise ahead of the tariffs, and a surge in consumer spending in March suggested households also sought to front-load purchases. Key inflation gauges cooled in the month.

Mr Powell also faced questions on the recent public criticism levelled at him and the Fed by senior government officials – including the US President, who has called repeatedly for him to cut rates to boost economic growth.

An upbeat Mr Powell said the criticism from Mr Trump “doesn’t affect doing our job at all”.

“We are always going to consider only the economic data, the outlook, the balance of risks, and that’s it,” he added. BLOOMBERG, AFP