Fed on Pause: Rate Uncertainty Dominates Rate Decision

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Washington DC, May 28, 2025 –

The U.S. Federal Reserve (Fed) decided to keep interest rates unchanged after its May 7 meeting, according to minutes released Wednesday. Officials adopted a "wait-and-see" approach, motivated by heightened economic uncertainty, with particular concern about persistent inflation and the potential impact of new government-imposed trade tariffs.

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Current Economic Assessment and Monetary Policy

During its May session, the Federal Open Market Committee (FOMC) opted to maintain the target range for the federal funds rate between 4.5% and 5.5%, according to the minutes summary, and to continue reducing the Fed's balance sheet. This decision came even though the economy, in the words of Chairman Jerome Powell, remains in a "solid position."

Main indicators analyzed:

Labor market: It remains strong, with unemployment at 4.2% and an average of 155,000 new jobs created per month in the last quarter. Employment is not considered a significant source of inflation.

GDP: After 2.5% growth in 2024, the first quarter of 2025 showed a slight slowdown, attributed to changes in net exports, possibly due to anticipated imports in anticipation of tariffs.

Inflation: Although it has declined since 2022, it remains above the 2% target. In March, the headline PCE index rose 2.3% year-over-year, and the core PCE index rose 2.6%. Furthermore, an increase in short-term inflation expectations was detected, attributed to tariff policies.

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The Role of Tariffs: A New Source of Risk

One of the most prominent themes in the minutes and Powell's remarks is the uncertainty surrounding trade tariffs. Recent fiscal policies could, officials say, increase the risks of both inflation and unemployment.

Powell warned that if the announced tariffs remain in place, they could increase inflation, slow economic growth, and raise unemployment, creating a dilemma: tightening monetary policy could worsen the recession, while relaxing it could fuel inflation.

Although the Fed expects these inflationary effects to be transitory, it also recognizes that they could become more persistent, especially if they affect long-term inflation expectations. The institution insists that its responsibility is to keep these expectations firmly anchored.

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Outlook: The Fed in Cautionary Mode

FOMC members agreed that, with growth still solid and the labor market resilient, maintaining a "moderately restrictive" policy stance is warranted while assessing the direction of inflation and economic activity.

Powell noted that the Fed's current stance is 100 basis points less restrictive than last fall, leaving room for observation without making abrupt moves.

However, some officials warned of the risk of inflation being more persistent than expected, which raises the priority of stabilizing inflation expectations.

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A Vigilant and Policy-Driven Fed

The Fed's future decisions will depend on updated economic data, forecasts, and, especially, the evolution of fiscal policies. While reaffirming its commitment to maximum employment and price stability, the Federal Reserve faces a complex environment, where monetary policy must respond to the side effects of fiscal decisions outside its control.

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