Fed Holds Rates as Powell Warns Tariffs May Raise Jobless Risk and Slow U.S. Growth

Fed Holds Rates as Tariff Uncertainty Raises Stagflation Risk

The Federal Reserve left its benchmark interest rate unchanged at 4.25%–4.5%, pausing for the fifth consecutive meeting as economic uncertainty intensifies. Chair Jerome Powell signaled patience in adjusting policy, citing trade-driven inflation risks and slower growth as dual threats complicating the Fed’s outlook.

Powell Flags Risk of Inflation and Slower Growth

In the post-meeting press conference, Powell warned that sustained tariffs could “generate a rise in inflation, a slowdown in economic growth, and an increase in unemployment.” He described the U.S. economy as “resilient and in good shape,” but emphasized that the Fed could afford to “wait and see” rather than act prematurely.

The Fed’s statement also flagged the rising threat of stagflation—slowing output combined with elevated prices—raising the difficulty of meeting its dual mandate. With inflation still above target and GDP showing early signs of contraction, the central bank remains caught between policy inaction and economic deterioration.

Tariffs Cloud Data and Business Sentiment

While the statement did not directly name tariffs, Powell’s remarks pointed clearly to the White House’s trade policies as a factor in tightening economic conditions. A recent 10% tariff on all U.S. imports, paired with threats of “reciprocal” duties, has pressured corporate margins and disrupted supply chains.

First-quarter GDP declined by 0.3%, weighed down by weaker consumer spending and a rush of imports ahead of the tariff deadline. Despite this, nonfarm payrolls added 177,000 jobs in April and unemployment held at 4.2%, offering the Fed a cushion as it monitors evolving risks.

Markets React Calmly, But Outlook Remains Unsettled

Equities initially dipped on the Fed’s cautious tone, but the Dow recovered to close nearly 300 points higher. Traders had priced in a pause, and market focus quickly shifted to potential rate cuts later this year. Fed funds futures still imply three cuts by year-end, though probabilities remain volatile.

Powell reiterated the Fed’s independence, stating that policy would be based solely on data and not political pressure. “We’re always going to consider only the economic data, the outlook, the balance of risks – and that’s it,” he said in response to questions about recent calls from the White House.

Market Forecast: Neutral to Bearish Short-Term Bias

With inflation still above the Fed’s target and tariffs threatening to drag on growth, traders should expect the central bank to remain cautious. Barring a surprise drop in inflation or a breakthrough on trade, rate cuts are unlikely before late Q3. The current setup favors a defensive trading posture, especially across equities and rate-sensitive assets.

More Information in our Economic Calendar.