Faced with Troubled Waters, the Fed Opts to Stay the Course

Despite pressure from President Donald Trump, the Fed delivered on what was widely expected by leaving its key interest rate unchanged. In fact, all 93 analysts in Bloomberg’s consensus forecast anticipated this outcome. Although the economic and financial outlook has changed quite a bit since the Fed’s last meeting in March, its officials have opted to stay the course. Today’s decision was unanimous.

That said, the official statement about the monetary policy decision points to the complexity of the situation. The Trump administration’s trade policy has muddied the waters. As the saying goes, there are no winners in a trade war—and this is certainly true for the Fed, which has to contend with the potential impact of tariffs on inflation and economic activity. This explains why the statement mentions that uncertainty has increased further, and more importantly, the risks of higher inflation and higher unemployment have increased since March. Stuck between both sides of its dual mandate, the Fed will have to see which of these problems strikes first or hardest. Unfortunately, we’ll have to wait until June to get our hands on updated Fed projections.

Speaking at the press conference, Jerome Powell alluded to the uncertainty and ambiguity surrounding the future course of the Fed’s monetary policy. The Fed has clearly taken a wait-and-see stance. “There’s just so much that we don’t know, I think, and we are in a good position to wait and see, is the thing. We don’t have to be in a hurry. ” With regard to trade policy, Mr. Powell added, “There’s so much uncertainty about the scale, scope, timing and persistence of the tariffs.” He then indicated that trade will be the key issue influencing upcoming decisions. “Until we know more about how this is going to settle out and what the economic implications are for employment and for inflation, I couldn’t confidently say that I know what the appropriate path [for our monetary policy] will be.”