This decision, however, does not reflect a stable or unified outlook on U.S. interest rates or economic conditions. Rather, it illustrates a state of inaction shaped by elevated levels of uncertainty that have persisted since the start of the year, primarily driven by trade policy, though not exclusively.

Insights from the May Meeting

The minutes from the May 6–7 meeting, alongside subsequent public comments from Chairman Jerome Powell, reveal a notable degree of concern among committee members.[1] At the time, the more extreme version of President Trump’s tariff program was still in effect, including additional charges of 145% on Chinese imports, among other measures.

The prospect of protracted tariffs was viewed as likely to contribute to both inflation (through increased prices) and economic slowdown (as businesses shed workers and scaled back expansion). This combination, known as “stagflation”, would pose a dilemma for the Fed, as neither raising nor lowering interest rates effectively addresses both issues simultaneously.[2]

Complicating matters further is the specter of the Fed’s earlier misjudgment of inflation, when a previous surge was initially characterized as transitory.[3] Chairman Powell suggested that the current “wait and see” stance is likely to persist, noting that the potential costs of waiting to gather more economic information are “fairly low”.[4]

The Ongoing Trade Dispute

Although widely described as a “trade war,” the progression of Trump’s so-called “Liberation Day” tariffs has resembled strategic posturing more than sustained conflict. Notably, shortly after the Fed’s May meeting, U.S. negotiators unexpectedly reached an agreement with their Chinese counterparts in Geneva, leading to a reduction in tariffs from 145% to 30%.[5] A similar development occurred with the EU later in the month, as the implementation of a 50% tariff was postponed until July.[6]

Nevertheless, the situation remains in constant flux, with tariffs frequently being introduced and withdrawn, and strained relationships with foreign powers continuing to produce conflicting signals.[7]

Should the tariffs prove to be a means rather than an end for the Trump administration, this pattern may persist indefinitely, or until the administration determines it has sufficiently reshaped the prior status quo.

Consequently, observers, including the Fed, are left with limited options beyond “wait and see”.

A Look Back at the Data

The Fed often emphasizes its commitment to a data-driven approach. On the surface, recent economic indicators might offer some reassurance.

Inflation – measured by both the CPI and the more closely watched PCE – declined year-over-year in April, according to data released in May.[8] Headline PCE fell to 2.1%, while Core PCE (which excludes volatile food and energy prices) dropped to 2.5%, marking its lowest level since March 2021.[9] The very latest CPI figures show Core CPI declining a little further, leading some to declare that the Fed has beaten inflation.[10]

On the employment front – another key element of the Fed’s dual mandate – conditions appear favorable. The unemployment rate held steady at 4.2% [11] in April, a historically low figure. GDP also seems healthy, with the only unusual activity stemming from a surge in advance orders made in anticipation of new tariffs.[12]

All of this may seem reassuring, critics may say, but the prevailing uncertainty means that past data may have little bearing on what lies ahead.

Conclusion

Fed officials hold varying views on how the year might unfold. Governor Christopher Waller, for instance, has suggested that the tariff dispute may eventually settle into a baseline rate of 15%, potentially opening the door to interest rate cuts later in the year.[13] By contrast, other members, including Dallas Fed President Lorie Logan, have expressed greater caution about any firm commitment to lowering rates at this stage.[14]

Given this divergence of views within the Fed itself, it would be prudent to avoid placing undue confidence in any single forecast. Ultimately, successful investing is less about predicting outcomes and more about recognizing the appropriate timing and manner in which to respond.

[1] U.S. Federal Reserve

[2] BBC

[3] New York Times

[4] Wall Street Journal

[5] CNN.com

[6] CNN.com

[7] BBC

[8] Federal Reserve Bank of St. Louis

[9] Forbes

[10] Bloomberg

[11] U.S. Federal Reserve

[12] BBC

[13] Wall Street Journal

[14] Reuters