Fed holds rates steady, defying pressure from US President Donald Trump | World News

The Fed gathered at a highly volatile moment for the economy and the global financial system amid an onslaught of policy changes from Trump just months into his second term in the White House.
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In a statement on Wednesday, the Fed acknowledged that the labour market was still “solid” but that uncertainty about the economic outlook had “increased further” and that the “risks of higher unemployment and higher inflation have risen.”
Since the Fed’s last meeting in March, the adminration announced and then rolled back aggressive new tariffs as Trump gave countries time to reach trade deals ahead of a July deadline. Still, a 10 per cent universal tariff remains in place, along with additional levies on steel, aluminium and cars. The president has also imposed a minimum tariff of 145 per cent on Chinese goods.
The whiplash has unnerved financial markets, stoking volatility as Wall Street digested the various tws and turns associated with Trump’s trade policy and his subsequent attacks on Jerome Powell, the Fed chair, for ignoring his demands to lower interest rates. Last month, typical correlations started to break down, signaling that financial markets had come under strain.
The upheaval has created complications for the central bank. It is struggling to both assess the economic fallout from Trump’s policies and game out how it will set monetary policy in an environment in which its goals of maintaining a healthy labour market and keeping inflation low and stable may be in tension with one another.Story continues below this ad
Officials have grown increasingly worried about how much Trump’s policies, which also include slashing spending and deporting immigrants, will sap growth. Some companies have already started to warn about sluggish sales as consumers have turned much more downbeat about the outlook; the fear is that the uncertainty will further chill business activity.
But unlike in the past, the Fed is not in a position to respond to early signs that the economy is weakening preemptively lowering interest rates. That is because of inflation: Price pressures stemming from the post-pandemic surge have not been fully snuffed out, and now Trump’s tariffs risk rekindling them.
It is too early to tell if the tariff-induced jump in inflation will prove to be temporary, or if it morphs into something more persent. So far, market-based measures of inflation expectations, to which the Fed pays closest attention, suggest that inflation will indeed remain contained after an initial pop. But officials do not want to make the same make as they did just a few years ago, when they underestimated how long lasting inflation would prove to be. While officials originally expected inflation to fade after pandemic-induced supply snags, it instead persed.
As such, the bar for the central bank to lower interest rates is higher this time.Story continues below this ad
Officials will most likely need to see tangible evidence that the labor market is beginning to weaken before restarting cuts. If monthly jobs growth grinds to a halt, or turns negative, and layoffs rise, that could be enough to bolster the central bank’s conviction that it can begin to reduce rates.