The Fed keeps interest rates steady as Powell warns that economic uncertainty is 'extremely elevated'

Yahoo

07-05-2025

Photo: Kevin Dietsch (Getty Images)
The Federal Reserve said Wednesday that it would keep interest rates steady at 4.25-4.5%, as the central bank continues to work to balance persistent inflation concerns with signs of a slowing U.S. economy.
While inflation has cooled from its 2022 highs, recent data hasn't provided sufficient assurance to begin reducing rates once again. But the Fed's message was a little different this time around, warning of rising risks of both higher unemployment and inflation and raising the possibility of a stagflationary scenario.
'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 said in a statement. 'The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated.'
Federal Reserve Chair Jerome Powell said in his own remarksthat the central bank remains committed to price stability and full employment — saying he wanted to prevent a one-time increase in the price level from becoming an continuing inflation problem.
He said the risks of higher unemployment and inflation have risen, and the current policy stance leaves the Fed 'well positioned' to address economic developments 'in a timely way.'
U.S. stock prices fell Wednesday, but the Dow was able to cling to slight gains after the widely anticipated move. The S&P 500 fell 0.5% in the 15 minutes after the release, and U.S. Treasury yields extended their fall.
The Fed's decision came against a backdrop of slowing economic growth and still-sticky inflation. The U.S. economy contracted by 0.3% in the first quarter of 2025, while the labor market showed resilience with 177,000 jobs added in April — a figure that only modestly exceeded expectations.
Core inflation, measured by the Fed's preferred metric, the Personal Consumption Expenditures price index, continues to hover above the 2% target, reinforcing the Fed's cautious stance.
'The economy itself is in solid shape,' Powell said. He added, though, to some laughs from reporters that 'my gut tells me that uncertainty about the path of the economy is extremely elevated.'
Part of that is because of the sweeping set of tariffs President Donald Trump announced in early April, including a 145% duty on Chinese imports. While the Fed doesn't directly weigh in on or set fiscal or trade policy, such developments will affect inflation dynamics going forward — and further complicate the Fed's task.
Powell addressed tariffs in his press conference, saying the central bank will continue to 'wait and see and watch' as the tariff policies change over the coming weeks and months. He said the Fed was comfortable in its policy stance and can move quickly when appropriate.