Fed Holds Rates Steady Despite Trump's Pressure…"Increased Inflation and Unemployment Risks" [Fed Watch]

May FOMC Holds Key Interest Rate at 4.25~4.5%

"Increased Inflation and Unemployment Risks"…Concerns of Stagflation

Powell Mentions "Increased Economic Uncertainty Due to Tariffs"

Reiterates Position to Wait Until Real Indicators Are Affected

Amid growing economic uncertainty due to the Trump administration's tariff policies, the U.S. central bank (Fed) held the key interest rate at 4.25~4.5% as expected by the market at the May Federal Open Market Committee (FOMC). Jerome Powell, the Fed Chairman, cited increased uncertainty and robust real economic indicators as reasons for holding the rate. He also emphasized that the relatively high key interest rate puts the economy in a good position to support it with monetary policy when signs of economic slowdown are detected. However, the FOMC statement noted that both unemployment and inflation are rising, indicating growing concerns about stagflation within the Fed.

"Uncertainty Has Increased"

The Fed stated in the FOMC statement that "while fluctuations in net exports have affected the data, recent indicators suggest that economic activity continues to expand at a solid pace." It mentioned that the reason for the U.S.'s first-quarter GDP contraction of -0.3% was due to companies advancing import volumes to avoid tariffs. The FOMC also reported that "unemployment has remained stable at low levels in recent months, and labor market conditions remain strong."

However, concerns about economic uncertainty were also expressed. The FOMC stated, "Uncertainty about the economic outlook has increased further," and "The FOMC is closely monitoring risks on both sides of its dual mandate of employment and price stability, and believes that the risks of rising unemployment and inflation have increased."

U.S. Economy Remains Robust

Chairman Powell, at a press conference held immediately after the FOMC, frequently mentioned the phrase "Wait and see." This indicates a more cautious approach to monetary policy amid growing economic uncertainty.

Powell particularly emphasized that the real economy remains robust. Even after removing the distorted figures of the first-quarter GDP (temporary import increase due to tariffs), the economy continues to show solid growth, according to his assessment. The U.S. labor market also remains strong. The U.S. Department of Labor announced on the 2nd (local time) that non-farm jobs in the U.S. increased by 177,000 in April compared to the previous month, significantly exceeding the Dow Jones forecast of 133,000. The April unemployment rate was 4.2%, unchanged from the previous month and in line with expert expectations.

"Wait and See"

Chairman Powell acknowledged that while the U.S. economy shows a robust appearance, concerns about economic slowdown have increased. He stated, "We believe that the risks to employment and price increases have both increased compared to March."

However, he could not provide a confident answer about the future direction of the economy. He said, "It is difficult to say how this situation will unfold," and "There is considerable uncertainty about how the tariff policy will settle and what impact it will have on the economy, growth, and employment."

For this reason, Chairman Powell repeatedly mentioned "Wait and see" during the day. He maintains the position that interest rates should be kept at the current level while waiting for additional clarity on tariffs.

"Not Influenced by Trump's Demand for Tariff Reduction"

Meanwhile, Chairman Powell stated that President Trump's demand for a rate cut "does not affect our performance of duties at all." He added, "We will use the tools we have to promote maximum employment and price stability for the benefit of the American people," emphasizing that "economic indicators, outlook, and risk balance are all we consider."

Full Text of May FOMC Statement

While fluctuations in net exports have affected some figures, recent indicators suggest that economic activity continues to expand at a solid pace. Unemployment has remained stable at low levels in recent months, and labor market conditions remain strong. Inflation remains somewhat elevated.

The Committee aims to achieve maximum employment and 2% inflation in the long term. Uncertainty about the economic outlook has increased further, and the Committee is closely monitoring risk factors on both sides of its dual mandate (employment and price stability), believing that the risks of rising unemployment and inflation have increased.

To support these goals, the Committee decided to maintain the target range for the federal funds rate at 4.25%~4.5%. In determining whether and when to adjust the target range in the future, the Committee will carefully evaluate new economic indicators, changing economic outlook, and the balance of risks. The Committee will also continue to reduce its holdings of Treasury and agency securities, including agency mortgage-backed securities (MBS). The Committee is strongly committed to supporting maximum employment and returning inflation to the 2% target.

In assessing the appropriate direction of monetary policy, the Committee will continuously monitor the impact of incoming information on the economic outlook. If risks arise that could impede the Committee's goals, it is prepared to adjust the policy stance as necessary. The Committee's assessment will be based on a comprehensive consideration of a wide range of information, including labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

The following members voted in favor of this monetary policy decision: Chair Jerome H. Powell, Vice Chair John C. Williams, Michael S. Barr, Michelle W. Bowman, Susan M. Collins, Lisa D. Cook, Austan D. Goolsbee, Philip N. Jefferson, Neel Kashkari, Adriana D. Kugler, Alberto G. Musalem, Christopher J. Waller. Neel Kashkari participated in the vote as an alternate member at this meeting.

New York = Correspondent Park Shin-young nyusos@hankyung.com