As Fed holds rates, Jerome Powell says larger-than-expected tariffs could worsen inflation, hamper growth, cause unemployment

At a scheduled review of its monetary policy, the Federal Open Market Committee (FOMC), led by Fed Chair Jerome Powell, on Wednesday decided to keep the key US lending rates unchanged citing growing uncertainty around trade tariffs. The development, as widely expected, comes amidst a 90-day pause in America's "reciprocal" trade tariffs on most of its trade partners announced by US President Donald Trump on April 9. According to Powell, Trump's the “substantially larger than anticipated" tariffs may end up worsening inflation, obstructing economic growth, and causing unemployment to rise.

The US interest rates have stood at the current level since mid-December. The Fed has reduced the post-COVID interest rates thrice during its scheduled reviews since September last year.  

Here are some of the key takeaways from the May 7 FOMC policy statement: 

Powell mentioned a lack of clarity about whether the US economy will continue a steady pace of growth, citing mounting uncertainty and an anticipated spike in inflation.

Referring to the trade tariff situation, the Fed Chair said "the scope, the scale, the persistence of those effects are very, very uncertain".

He said it is "not at all clear" what the appropriate response for monetary policy is and also "not at all clear what it is we should do". 

Wall Street continued to hold on to intraday gains after the FOMC policy announcement as well as the post-policy press conference.

Dow Jones Holds on to Intraday Gains

The Dow Jones Industrial Average gained 285 points, or 0.7 per cent, to end at 41,114, the S&P 500 rose 24.4 points, or 0.4 per cent, to settle at 5,631.3 while the tech stocks-heavy Nasdaq Composite closed 48.5 points, or 0.3 per cent, higher for the day at 17,738.2. Buying in consumer discretionary and technology stocks supported overall gains on Wall Street though selling pressure in communication services shares played spoilsport, limiting the upside. 

Don't think we can say which way this will shake out: Jerome Powell as Fed holds rates steady 

"I don't think we can say which way this will shake out," said Powell, suggesting that the Fed is in a way sidelined until the trade tariff policy takes full effect.

“Uncertainty about the economic outlook has increased further,” read the FOMC statement.

3 key takeaways from FOMC policy

The panel said it is "attentive to the risks to both sides of its dual mandate and judges that the risks of higher unemployment and higher inflation have risen". 

It reiterated its strong committment to "supporting maximum employment and returning inflation to its 2 per cent objective".

It vowed to continue to monitor incoming data for its economic outlook.