Moneycontrol Pro Panorama | Fed Faces a Dilemma

 The US Federal Reserve finds itself navigating a period of uncertainty, largely driven by the evolving policy landscape under President Donald Trump. In response to this ambiguity, the Fed has opted to maintain its benchmark interest rate at 4.25-4.5 per cent. The decision reflects concerns about potential trade disruptions stemming from tariff-related policies, alongside rising inflationary pressures and growing unemployment risks.

The cautious approach taken by the Fed was evident in Chairman Jerome Powell’s remarks. While he reaffirmed that the US economy continues to expand at a “solid pace,” he also acknowledged the unpredictability of this growth trajectory. There is lingering uncertainty over whether the current momentum can withstand the headwinds from Trump’s policy shifts.

An article in the Financial Times titled “The Fed Digs In” (free for MCPro subscribers) suggests that the central bank may be wary of a potential stagflation scenario. Although the Fed is not formally predicting a rise in both inflation and unemployment, these risks are clearly influencing its reluctance to alter rates without stronger data support.

According to many economists, hopes for rate cuts in the near term may be misplaced. A prolonged pause in rate action is likely, with some predicting that the next move might not come until September. The Fed has adopted a “wait-and-watch” approach following an aggressive one percentage point rate reduction earlier.

In contrast to the Fed’s cautious stance, central banks across Europe and Asia are actively pursuing monetary easing. The European Central Bank is widely expected to reduce rates this quarter, while countries like India and China continue to lean towards lower interest rates as part of their economic strategies.