The Federal Reserve decided to keep its benchmark interest rate unchanged at 4.25-4.50% during its meeting on the 18th, maintaining its forecast of two rate cuts within the year despite rising internal divisions. While some members are concerned about tariff-induced stagflation and have shifted towards supporting no rate cuts this year, others hold onto the possibility of easing later.
The decision to maintain a "wait and see" approach is driven by uncertainties surrounding the Trump administration's tariff policies and their potential impact on inflation. Recent data shows limited tariff-induced inflation, with the Consumer Price Index (CPI) and Producer Price Index (PPI) for May reflecting minimal changes. However, retail sales have declined, indicating a slowing real economy.
Experts caution that the effects of tariffs on U.S. prices could soon become apparent, with Goldman Sachs predicting inflation may reach 4% by year's end. Fed Governor Adriana Kugler has emphasized the need to consider inflation risks before adjusting rates.
The robust labor market provides the Fed with some breathing room, as the economy added 139,000 non-farm jobs in May, and the unemployment rate remains low at 4.2%. This resilience supports the Fed's decision to maintain its current stance, allowing more time to evaluate the broader economic impacts of tariffs and Middle East tensions.
Within the Fed, opinions are polarized. The latest Summary of Economic Projections (SEP) shows a shift, with more officials now expecting rates to remain unchanged by year-end. Meanwhile, predictions for rate cuts have decreased, reflecting the division over handling inflation and economic slowdown risks.
The Fed's cautious stance and internal divisions underscore the challenges of navigating economic uncertainties amid geopolitical and domestic pressures. As the year progresses, the Fed will closely monitor developments to adjust its policy accordingly.
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