The Federal Reserve (Fed) has decided it’s all about them. They are about to hold interest rates constant, holding the Fed funds range at 4.25% to 4.50% for the third meeting in a row. This decision is indicative of the Fed’s more cautious approach as it now finds itself confronted with growing economic uncertainties, especially those surrounding inflation and unemployment. The FOMC is clearly on the lookout for risks. Yet—they are still fighting the good fight, with full-throated commitment to their hard-won dual mandate to achieve maximum employment alongside stable prices.
As Fed Chairman Jerome Powell has made clear, the central bank isn’t in a rush to cut rates. He noted that recent tariff increases could derail recent efforts to make headway on moving towards its long-term economic objectives. Powell pointed out that if tariffs remain at the current elevated levels, “then we won’t see further progress toward our goals.” He noted that President Trump’s tariff increases are “much bigger than anticipated.” This begs the question of whether they are having a negative effect on economic growth.
Following the FOMC’s announcement, financial markets jolted in reaction. Doom and gloom The S&P 500 index dropped almost 40 points down to about 5,580 before bouncing back a bit. In tandem, the tech-heavy Nasdaq Composite lost roughly 50 points through the middle of the day on Wednesday. This response was not a surprise, as 98% of interest rate traders were already betting that rates would stay the same.
The decision to keep rates at their current level appears indicative of the macroeconomic environment. Though the unemployment rate has continued to be quite low in recent months. At the same time, labor market conditions remain exceptionally strong. The FOMC statement highlighted that “although swings in net exports have affected the data, recent indicators suggest that economic activity has continued to expand at a solid pace.” Though these are all promising signs, inflation is still high – playing a role in keeping the Fed’s hawkish posture.
The default assumption of the FOMC appears to be that risks to its dual mandate are about national economic conditions. It has found that the prospects of greater unemployment and inflation have each increased. Powell reiterated this sentiment, stating, “I can’t tell you how long it will take, but for now, it does seem like it’s a fairly clear decision for us to wait and see and watch.”
In a single day, the share of traders wagering on no move on interest rates at least until June, shot from 68% to 71%. This change reflects a deepening market faith that the Fed knows what it’s doing. Analysts are increasingly focused on the long-term effects of continued tariff increases on inflation and general economic growth. Yet Powell himself warned that keeping these tariffs in place would raise inflation. This would risk reversing the ongoing economic recovery and raising unemployment.
Natalie Hwang, an economist, commented on the current economic climate, stating, “We’re in a moment where policy caution is prudent. For private markets, meaningful shifts in exit activity will require more than rate stability—they depend on a broader recovery in market confidence, sustained earnings growth, and greater clarity on inflation trajectories.”