Fed Maintains Rates Cautious Amid Inflation, Tariff Risks

The Federal Reserve's May 6-7 meeting minutes reveal that officials remain cautious and patient regarding interest rate adjustments due to heightened economic uncertainty, particularly related to tariffs and their potential inflationary effects. Policymakers noted increased risks to both employment and inflation, which complicates the balancing of their dual mandate. The Fed decided to keep rates steady at 4.25%-4.50%, with no immediate plans for cuts, reflecting a wait-and-see approach amid mixed economic signals and ongoing trade tensions. Market expectations for rate cuts in 2025 have decreased, with traders now anticipating only two cuts compared to earlier predictions of four or more, influenced by the Fed's cautious stance and divergent views among regional Fed presidents. Additionally, the Fed has slowed the pace of its balance sheet reduction as part of its inflation control strategy. Chairman Jerome Powell acknowledged tariffs as a significant factor contributing to inflation uncertainty, underscoring the challenges faced in forecasting economic outcomes.