On Wednesday, 7 May 2025, the U.S. Federal Reserve maintained its benchmark interest rate at 4.25%–4.50% for the third consecutive meeting. This decision reflects the central bank’s cautious approach in the face of increasing economic uncertainties, including potential inflation and unemployment risks.
Fed Chair Jerome Powell highlighted that the economy remains solid with a strong labour market. However, he acknowledged that the Trump administration’s tariff policies have introduced significant uncertainty, potentially leading to higher inflation and slower growth. Powell stated that the Fed is adopting a “wait and see” approach, emphasising the need for more data before considering any policy changes.
Market reactions
Following the Fed’s announcement, U.S. stock markets experienced a volatile session but ultimately closed higher:
- The S&P 500 gained 0.4% to close at 5,631.28.
- The Dow Jones Industrial Average rose 0.7% to 41,113.97.
- The Nasdaq Composite increased by 0.3% to 17,738.16.
Investors appeared relieved by the Fed’s steady stance, although concerns about stagflation—simultaneous inflation and economic slowdown—persist. Bond yields eased slightly, and the dollar index strengthened, reflecting cautious optimism in the markets.
The Trump administration’s response
President Donald Trump expressed dissatisfaction with the Fed’s decision, reiterating his calls for immediate rate cuts to stimulate the economy. Despite previous threats to remove Powell, Trump indicated he would allow the Fed Chair to serve out his term, which ends in May 2026. The administration continues to pursue aggressive trade policies, including tariffs on imports from several countries, which have contributed to economic uncertainties.
The Fed’s decision underscores its commitment to data-driven policymaking, resisting political pressure to adjust rates prematurely. As economic indicators evolve, the central bank remains poised to respond appropriately to maintain stability and support growth.
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