FOMC Maintains Interest Rates Amid Increasing Economic Uncertainty

Economic uncertainty has caused some companies to increase imports, withhold expectations for future earnings, and even reallocate their assets over the past several months. It has also been cited as one of the main driving factors in the FOMC’s most recent decision.

Heightened uncertainty drove the Fed to maintain interest rates at the current level. The committee also provided insight into the most recent economic data and how it shaped their decision.

FOMC Holds Interest Rates Steady

At the May 6^th and 7^th meeting, FOMC members reviewed changes to the economy and outlook. This information factored into their decision to maintain the Fed Funds Rate at a target range of 4.25 – 4.50%.

Just a month ago, analysts maintained a 40% probability of a rate cut at the May meeting and only a 60% chance of stable rates. However, the likelihood of a cut dwindled over the following weeks. Analysts had updated their expectations the day before the meeting to show only a 3% chance of a cut and a 97% probability of no change to interest rates.

So, what happened in the past month that changed analyst opinions and ultimately led to the interest rate decision? Notable reports were released shining new light on the economic situation, and major changes were announced to U.S. trade policy.

Data And Uncertainty Informed the FOMC’s Decision

The FOMC’s most recent interest rate decision was driven by several new data points. First, government agencies released updates on unemployment and inflation, which serve to monitor progress toward the Fed’s dual mandate. Second, new information about the economy as a whole was released including Q1 GDP and tariff announcements.

Stable Unemployment

The Bureau of Labor Statistics released an updated Employment Situation Report which indicated that the unemployment rate held steady at 4.2%. This rate has remained in a narrow band between 4.0 and 4.2% since May 2024.

In the press conference following the interest rate announcement, Federal Reserve Chairman Jerome Powell explained that risks to the labor market are roughly in balance at the current time. However, he also mentioned that tariff policies could have an adverse impact on unemployment if they are implemented at the announced levels.

Elevated Inflation

The latest reading of the PCE Price Index showed that the annualized inflation rate fell from 2.7% in February to 2.3% in March. Despite this promising decline, price growth remains above the Fed’s 2% goal.

Chair Powell also noted that a “broad range of surveys” have shown heightened inflation expectations in the short term. He did not clarify which reports the FOMC follows, but the Surveys of Consumers from the University of Michigan confirms his claim. This survey showed that year-ahead inflation expectations surged by 1.5 percentage points to 6.5% – marking four consecutive months of unusually large increases and the highest reading since 1981.

Steady Economic Activity

The Advance Estimate from the Bureau of Economic Analysis showed that real GDP fell from 2.4% in Q4 2024 to -0.3% in Q1 2025. This decline appears staggering, but a surge of imports ahead of tariffs made the GDP calculation much more difficult to interpret.

Chair Powell noted this difficulty and pointed to an alternative measure of economic activity – the Private Domestic Final Purchases [PDFP] calculation. This figure is a component of GDP which measures the amount private entities spend on final products and services. Chair Powell reported that PDFP held steady year-over-year despite the massive shift in GDP.

Economic Uncertainty

The federal government has announced substantial shifts in policy – including the addition of wide-ranging tariffs. Chair Powell explained that if the tariffs are implemented as announced, they could result in higher unemployment, higher inflation, and lower economic output.

Altogether, recent data suggests a relatively stable economy with low unemployment, improving inflation, and steady growth. However, uncertainty and new trade policies have the potential to disrupt all three areas.

Where are rates headed?

Given the heightened uncertainty, the future of interest rates is hazy at best. However, forecasts from the FOMC and market analysts can provide some clarity on the path forward.

The FOMC released their latest forecasts about the future of monetary policy at the March meeting. These projections showed an end-of-year Fed Funds Rate of 3.9% – which signals two 0.25% rate cuts this year.

Market analysts show a slightly different outcome. One of the most closely watched sources of market expectations is the CME FedWatch tool which currently predicts an end of year target range of 3.50 – 3.75%. This outcome is slightly lower than the Fed’s forecast and would require three cuts at the standard 0.25% per meeting move.

While both the FOMC and market data provide some insight, the economic situation is rapidly evolving, and these forecasts could change just as quickly. Fortunately, Chair Powell believes that the Fed is well positioned to take a wait-and-see approach which would allow them to adapt policy based on incoming data.

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