The US Federal Reserve is likely to keep interest rates on hold as the labor market cools and the prices of goods and services soar after the joint US-Israeli attack on Iran.
The central bank will keep interest rates between 3.5% and 3.75%, consistent with the Fed’s decision last month to keep rates unchanged.
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“The Committee aims to achieve maximum employment and 2% inflation over the long term. Uncertainty surrounding the economic outlook remains high. The impact of developments in the Middle East on the U.S. economy is unclear,” the central bank said in a statement announcing the policy decision, referring to the Federal Open Market Committee.
“The Commission is mindful of the risks on both sides of its dual mandate.”
The interest rate stay was in line with expectations. CME FedWatch, a tool that tracks monetary policy decisions, predicted there was a 99% chance that interest rates would remain unchanged.
The stall will occur after three rate cuts in 2025.
worldwide dissatisfaction
Consumers are also facing the impact of U.S. President Donald Trump’s trade and military policies on their daily spending.
“Despite meaningful progress on inflation in 2024, President Trump’s tariffs have slowed progress and inflation has remained persistently above the Fed’s target. Rising prices for services have driven up wholesale prices, and now President Trump’s war on Iran is shaking up commodity markets around the world,” Elizabeth Pancotti, managing director of policy and advocacy at the Groundwork Collaborative, an economic think tank, said in a comment to Al Jazeera.
Last month, the U.S. Supreme Court ruled against the president regarding his use of the International Emergency Economic Powers Act (IEEPA). The high court said the president exceeded his authority and the tariffs imposed under the order should be returned. However, the President has since imposed new tariffs that are not covered by IEEPA.
The White House announced a 15% tariff under Section 122, which allows the president to impose tariffs for 150 days. These changes are reflected in the Producer Price Index report released Wednesday by the U.S. Department of Labor’s Bureau of Labor Statistics.
Wholesale prices rose 0.7% in the same month, the largest monthly increase in a year. Commodity prices overall rose 1.1% after two months of decline. Energy prices rose 2.3%, and gas and gasoline prices rose 1.8%. These costs are expected to rise further as tensions in the Strait of Hormuz escalate following the joint US-Israeli attack on Iran in late February and subsequent retaliation.
“In the near term, higher energy prices will push up overall inflation, but it is too early to know the extent and duration of the potential economic impact,” Fed Chairman Jerome Powell told reporters.
Gasoline prices have skyrocketed for U.S. consumers over the last month. The average price of a gallon of regular gasoline was $3.84, up from $2.92 this time last month.
“The Fed’s inflation concerns extend beyond weathering the temporary wave of price increases associated with tariffs and, more recently, rising energy prices,” Stephen Stanley, chief U.S. economist at Santander US Capital Markets, told Reuters.
labor market impasse
The stagnant job market also calls for interest rates to remain unchanged. According to the latest jobs report released earlier this month, the US economy has lost 92,000 jobs and the unemployment rate has risen to 4.4%.
Meanwhile, the number of open jobs in the United States remained unchanged from last month at 6.9 million, according to the Job Openings and Turnover Survey (JOLTS) report released last week. This shows that employers are stagnant in hiring, and those who do have jobs are unlikely to take up new jobs.
“This may be one of the toughest moments for the Federal Reserve’s Open Market Committee in recent memory,” Michael Linden, a senior policy fellow at the Washington Center for Equitable Growth, said in comments provided to Al Jazeera. “Recent data shows that economic growth in the second half of last year was extremely weak, the labor market appears to be on the brink of collapse, and prices continue to rise faster than anyone is comfortable with.”
political undercurrent
Wednesday’s decision is the penultimate for current Fed Chairman Jerome Powell, whose term ends in May. Powell, the first person Trump appointed in his first administration, has been the target of Trump’s disdain and criticism for not going far enough in lowering interest rates.
“It’s too late. When will President Powell lower interest rates?” Trump posted on his social media platform Truth Social on Wednesday morning ahead of the decision.
President Trump has previously said he would not nominate anyone to lead the central bank unless the nominee agreed with his position.
“Anyone who disagrees with me will never be Fed Chairman!” Trump said in a December post on Truth Social.
“We at the Fed will continue to conduct our work with objectivity, integrity, and a deep commitment to serving the American people,” Powell told reporters.
Mr. Trump’s nomination to replace Mr. Powell, Kevin Warsh, is in flux, with Republican Sen. Thom Tillis saying he would not vote to promote Mr. Trump’s nominee to the central bank until the criminal investigation into the current chairman, Powell, is concluded.
Mr. Tillis serves on the Senate Banking Committee, which vets central bank candidates, including Mr. Warsh. He said he would not approve Mr. Trump’s Fed nominations until the investigation into Mr. Powell is concluded. Mr. Powell’s criminal investigation has focused on the Fed’s building renovations after a judge quashed a grand jury subpoena and called the investigation an excuse to pressure the central bank to lower interest rates.
If Mr. Warsh is not confirmed by the Senate by the June 16-17 Fed meeting, Mr. Powell will continue to head the Federal Open Market Committee, which sets interest rates.
“If a replacement is not approved by the end of my term as chair, I will continue to serve as chair until it is approved. That is what the law requires,” Powell said.
“As to the question of whether I will resign while the investigation is ongoing, I do not intend to resign from the board until the investigation is fully and truly concluded with transparency and finality.”
