Federal Reserve Leaves Interest Rates Unchanged, Warns of Stagflation

‘Despite heightened uncertainty, the economy is still in a solid position,’ Fed Chair Jerome Powell said.

Federal Reserve Chair Jerome Powell speaks during a news conference following a Federal Open Market Committee meeting at the William McChesney Martin Jr. Federal Reserve Board Building in Washington, on May 7, 2025. Andrew Harnik/Getty Images

The Federal Reserve left interest rates unchanged for the third consecutive meeting as policy-setting officials warned about the effect of tariffs on unemployment and inflation.

Monetary officials completed their two-day policy meeting on May 7, voting to keep the benchmark federal funds rate—a tool for influencing economic activity—at a range of 4.25 percent to 4.5 percent.

Investors widely expected this month’s policy decision.

In a post-meeting statement, the Fed highlighted that the U.S. economy remains in good condition.

“Although swings in net exports have affected the data, recent indicators suggest that economic activity has continued to expand at a solid pace,” the Federal Open Market Committee 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.”

However, the rate-setting committee signaled that the risk of higher unemployment and inflation, also known as stagflation, has risen.

Fed Chair Jerome Powell told reporters at the post-meeting press conference that it is “too early” to know which side of the twin mandate of maximum employment and price stability should be more in focus.

The institution will continue to monitor the data, he said, adding that monetary policy is “moderately restrictive” and is “well-positioned.”

“The leaves us in a good place to wait and see,” he said.

“We don’t think we need to be in a hurry. We think we can be patient.

“The risks of higher unemployment and higher inflation appear to have risen, and we believe that the current stance of monetary policy leaves us well positioned to respond in a timely way to potential economic development.”

Tariff effects have yet to appear in the hard data, he said. Since any assessment is hypothetical and speculative, according to Powell, the Federal Reserve cannot employ preemptive rate cuts.

Still, the statement signaled that the Fed thinks the first-quarter negative gross domestic product (GDP) reading was a one-off and could rebound in the April–June period, according to Bob Lang, the founder of Explosive Options.

“Fed believes the economy is strong, employment is strong, and inflation remains elevated,” Lang said in a note emailed to The Epoch Times.

“That means they believe the negative print will reverse in the next quarter.”

The Fed, meanwhile, reiterated plans to keep reducing the size of its balance sheet holdings. Since its tightening campaign started in April 2022, the central bank’s balance sheet, composed of Treasury and mortgage-backed securities, has declined by approximately $2 trillion to below $6.7 trillion.

Market Reaction

U.S. stocks were little changed midweek.

The blue-chip Dow Jones Industrial Average rose by more than 200 points. The tech-heavy Nasdaq Composite Index and the broader S&P 500 fell by about 0.7 percent and 0.2 percent, respectively.

U.S. Treasury yields were mixed, although the benchmark 10-year yield fell below 4.27 percent.

Traders continue to price in three rate cuts this year, even as Fed officials have indicated two quarter-point reductions by the year’s end.

“The Fed is content to stand pat until there is economic data that compels them to change interest rates,“ Greg McBride, chief financial analyst at Bankrate, said in a statement to The Epoch Times. ”With inflation already elevated and expected to move higher, it will take evidence of a material downturn in the job market before the Fed resumes cutting interest rates.”

Bumpy Path for Rate Cuts

For weeks, traders had signaled that a June rate reduction was almost certain to happen. Investors pushed back their rate cut expectations following last week’s stronger-than-expected April jobs report.

According to the CME FedWatch Tool, the futures market is now penciling in a quarter-point reduction at the July meeting.

The shift in market odds is not entirely surprising, as Powell and many of his colleagues have expressed patience, advocating a wait-and-see approach before taking policy action.

In an April 24 interview with CNBC’s “Squawk Box,” Cleveland Fed President Beth Hammack stated that she thinks policymakers need to have patience rather than follow through on preemptive policy maneuvers.

“I think this is a time when we want to make sure we’re moving in the right direction, [rather] than moving too quickly in the wrong direction,” she said. “So I would rather take our time to make sure we’re looking at the data, the hard data, which are actually really good.”

While the first-quarter GDP contracted by 0.3 percent, fueled by enormous imports and a modest decline in government spending, the Bureau of Economic Analysis reported a 22 percent increase in private investment and a modest 1.8 percent rise in net exports.

The Atlanta Federal Reserve Bank forecasts positive growth in the second quarter. The regional central bank’s GDPNow Model estimate projects a 2.2 percent expansion.

In addition, the U.S. economy created a better-than-expected 177,000 new jobs in April, above the trailing three-month average of 152,000.

Prices have also stabilized. The Fed’s preferred inflation measure, the personal consumption expenditure (PCE) price index, slowed sharply in March. The annual headline PCE inflation eased to 2.3 percent, the lowest in five months. Core PCE, which strips the volatile food and energy categories, eased to a nine-month low of 2.6 percent.

As the effects of President Donald Trump’s tariffs travel through the economy, Powell suggested that these levies “are highly likely to generate at least a temporary rise in inflation.”

“The inflationary effects could also be more persistent. Avoiding that outcome will depend on the size of the effects, on how long it takes for them to pass through fully to prices, and, ultimately, on keeping longer-term inflation expectations well anchored,” Powell said at an April 16 event hosted by the Economic Club of Chicago.

The next Fed meeting is scheduled for June 17 and 18.

A key development at the June meeting will be an updated Summary of Economic Projections, a quarterly survey of monetary policymakers and their economic and policy expectations.