Fed keeps rates steady as risks of slower growth, higher inflation rise

Investing.com -- The Federal Reserve left interest rates unchanged Wednesday as growing risks to economic growth and higher inflation leave the central bank rooted in its wait-and-see approach until the fog around the impact of the Trump administration’s tariffs is lifted.

The Federal Open Market Committee, the FOMC, left its benchmark rate unchanged in a range of 4.25% to 4.5%. 

The lack of urgency from the central bank to adjust its benchmark rate comes in the wake of a slew of tariffs rolled out by the Trump administration that has not only muddied the economic outlook but also threatens to slow growth and boost inflation--two potential dynamics that possibly put the central bank’s goals of stable inflation and maximum employment in question.    

"The Committee 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," the Fed said.

The Fed’s acknowledgement of growing risks to its dual mandate drew a brief negative reaction in markets as stocks slipped and Treasury yields rose. A late rally in semiconductor stocks eventually helped lift U.S. equities to a positive close.

"We think the statement was slightly hawkish versus expectations. The Committee did not acknowledge slowing in the economy," analysts at Morgan Stanley (NYSE:MS) said following the decision. 

Clarity on the tariff front isn’t expected soon. While the Trump administration has teased upcoming trade deals as it pursues its country-by-country negotiation plan, there is no sign that the U.S. and China are making progress to undo the damaging levies they have imposed on each other.

On the heels of the Fed decision, President Donald Trump said Wednesday that he wasn’t open to pulling back on the 145% tariffs imposed on Beijing. 

As brinkmanship on trade between the U.S. and China looks set to continue, economists expect the Fed will have limited room to maneuver on the monetary policy front.

At the press conference that followed the rate decision, Fed chair Jerome Powell suggested that policymakers will likely stay on the sidelines until there is more certainty around the impact of the tariffs eases. "The costs of waiting to see further are fairly low," Powell said.

But the Fed leader signaled that it could take a while for the clarity to come on the trade front. "I can’t tell you how long it will take, but for now, it does seem like it’s a fairly clear decision for us is to wait and see and watch," he added.

"Powell’s main message in the press conference was one of patience," analysts at BofA said in a note.

(Scott Kanowsky contributed reporting.)