On June 2, business as usual continued for Federal Reserve Chair Jerome Powell. He announced this significant decision at the Division of International Finance’s 75th Anniversary Conference in Washington, D.C. On one side, the Fed is now closely monitoring the economic consequences of newly imposed tariffs. They are even auditing the impact of these tariffs on inflation and employment figures.
The federal funds rate is currently between 4.25% and 4.5%. This is the new baseline, a particularly high floor due to a large increase, adopted last year, in response to an inflation spike that began during the pandemic. Powell’s move comes on the heels of new inflation data, which recorded an uptick in the pace of price increases. Even with this increase, inflation is still near its lowest levels since 2021.
In his remarks, Powell again struck a hawkish tone on the economic outlook. He particularly emphasized the long-term consequences of tariffs on stagflation, a dangerous loop of stagnant growth coinciding with choked inflation. He noted, “We don’t think we need to be in a hurry. We think we can be patient.” If this sentiment is on the mark, it would indicate that the Fed will indeed take a more cautious approach as it moves through today’s economic environment.
The surprise decision to hold rates at their current level was made just days after a disappointing employment report for May. Hiring did seem to be slowing, but the labor market has been surprisingly resilient. The Fed’s continued recalibration of the hard economic facts is taking place against a rapidly changing backdrop of trade relations between the U.S. and China.
Recent positive intervening circumstances, such as a trade agreement that lowered the contentious tit-for-tat tariffs, adding up to over a thousand points to the stock market. Since this new deal went through, Wall Street firms have updated their projections. As a result, they’re expecting a smaller likelihood of an impending recession than they were previously. Powell made clear that he will be monitoring these shifts closely to assess their impact on inflation and the nation’s long-term economic vitality.
Meanwhile, the inflationary impact of those goods tariffs from Mexico and Canada has started to relax. An average 10% tariff remains in place for all but a few imports—semiconductors and pharmaceuticals. The Fed is considering all these factors as it plans its next moves on monetary policy.
Recent data and other economic signals since have caused Powell to sound the alarm and signal a shift on monetary policy. He now expects two more quarter-point cuts in 2026 and one in 2027. He has halted a rush to fix things on a short-term basis, advocating that we all take a step back, be patient, and observe first.
Former President Donald Trump has openly criticized Powell’s decision-making, claiming, “We have a man who just refuses to lower the Fed rate. Maybe I should go to the Fed. Am I allowed to appoint myself? I’d do a much better job than these people.” Trump’s comments add to the growing pressure from elected leaders on the Federal Reserve not to raise interest rates.
Four meetings and six months later, we’re still waiting for the next interest rate increase. Powell’s recent decision is a perfect example of a careful but calculated move to tapering the economy after seeing some overinflation in recent months and rolling employment numbers. Warning signs are flashing that prices are set to rise in coming months. This dynamic will be front and center in the Fed’s inflation assessment moving forward.
