The Federal Reserve announced on Wednesday that they’re keeping interest rates the same, warning that the chances of higher unemployment and inflation are going up because of President Trump’s tariffs plan. They didn’t talk about the tariffs directly, but they did mention that all the trade drama is messing with the economic data they use to make decisions. The Fed’s federal funds rate is staying put at a target of 4.25% to 4.5%. Fed Chair Jerome Powell said, “We don’t have to rush things, the economy is tough and doing pretty okay.” The Fed noted that the economy is growing at a decent pace overall, jobs are still good, but inflation is kind of high. They also said that the risk of more unemployment and even more inflation is getting bigger.
In a message to clients, Omair Sharif, from Inflation Insights, said the Fed is basically saying we might end up in a rough spot with both high inflation and slow growth. This kind of situation, called stagflation, happens when prices go up, but the economy slows down. Before the Fed made their announcement, Trump made it clear that he’s not backing down from the big tariffs on China. Powell mentioned that the inflation caused by the tariffs could be short-term or last a while, depending on how high the tariffs go and how long they stick around. The federal funds rate is a big deal because it affects everything from car loans to credit cards. Credit card rates are still way up from before the pandemic, at over 21%. Car loan rates have gone down more, though. Mortgage rates don’t follow the federal funds rate as closely, but they’re still high because the government’s borrowing costs are still up there.
Most people think the Fed will keep interest rates the same until at least June, with the first cut of 2025 probably happening in July. The big question for the Fed is how much the tariffs will mess with prices going forward. One Fed person thinks any price hikes from the tariffs won’t last long and wants to start cutting rates soon. Trump also wants lower rates, even though the latest jobs report showed the US is still adding jobs at a good pace. But other Fed folks think it’s better to wait on cutting rates until things really start going downhill. Even though hiring has slowed, layoffs haven’t been too crazy.
Ed Yardeni, from Yardeni Research, thinks it’s better for the Fed to wait and see if inflation or unemployment is a bigger problem. For now, it looks like inflation is the bigger issue. Yardeni thinks the markets will be up and down for a while, but eventually, Trump will give in on the tariffs because he can’t risk a recession. Retail investors, regular folks who invest, are still buying even though big investors are selling. Americans will always buy because they need to save for retirement. They might not get a lot of attention, but they’re the ones who matter most in the market.
Overall, it looks like the Fed is standing firm on interest rates for now, waiting to see how everything plays out. With tariffs causing uncertainty and inflation on the rise, it’s a tricky time for the economy. But as long as regular people keep investing, the market should stay afloat despite the ups and downs.
