Fed Meeting Recap – May 7, 2025: No Rate Cuts Yet as Inflation Risks and Trade Uncertainty Dominate the Outlook

In its May 7, 2025 meeting, the Federal Open Market Committee (FOMC) voted unanimously to leave the federal funds rate unchanged at 4.25%–4.50%, maintaining the policy stance held since December. While this outcome was widely expected by markets, the meeting signaled a slight shift in tone — reflecting growing unease about inflation risks, labour market dynamics, and geopolitical uncertainty tied to U.S. trade policy.
Let’s unpack what changed, what stayed the same, and what it means for the months ahead.

Key Changes in the Fed Statement

The Fed’s policy statement, compared to its March version, introduced a more cautious outlook on both inflation and employment.

Inflation & Employment Risks:

The Committee acknowledged that “the risks of higher unemployment and higher inflation have risen” — a notable departure from previous communications that were more confident about a soft landing.

New language:

“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.”

This more balanced but cautious phrasing highlights the dilemma the Fed faces: it may soon need to choose between cutting rates to support the labour market or maintaining them to keep inflation under control.

Data-Driven, But Data-Dependent

Chair Jerome Powell emphasized that the Fed will not be “rushed” into rate cuts — a message to financial markets, which are still pricing in as many as three cuts this year, with an 55% probability of the first 25 bps rates cut coming in July.

But Powell added a crucial caveat: “Absent a decisive turn in the US economic data, the FOMC seems comfortable remaining on hold indefinitely.”
In short, the Fed wants more clarity — not just on inflation and labour, but also on what’s coming out of the White House.

The Trump Tariff Factor

A major factor behind the Fed’s caution is renewed uncertainty about trade policy. Since President Trump’s unexpected announcement of sweeping tariffs on April 2 — including a 145% cumulative levy on imports from China — uncertainty has surged.

Some of those tariffs were paused for 90 days, but the ambiguity around trade strategy has clouded the Fed’s visibility. Powell said the central bank is watching closely but stressed that “this is their mandate, not ours,” referring to the executive branch.

With U.S.-China trade talks expected in Switzerland later this week, the FOMC appears to be in a reactive stance — a position Powell acknowledged openly.

“The Fed is very much at the whim of policies coming out of the White House,” said economist Claudia Sahm.

The Fed in the Shadow of Trump: Powell’s Leadership Under Pressure

While Jerome Powell remains at the helm of the Federal Reserve, his influence over market sentiment appears diminished. Since April, President Trump has taken center stage in shaping expectations — not through policy decisions, but via a barrage of social media commentary and political pressure.

After the tariff announcement triggered a swift 20% market correction, Trump escalated his rhetoric, openly accusing Powell of harming U.S. growth and questioning whether he should be replaced — a move that, while technically impossible without cause, sent a clear political message.

In this environment, Powell has stayed committed to a wait-and-see approach, constrained by the Fed’s dual mandate: maximum employment and price stability. Yet markets increasingly interpret the real market mover to be the president, not the central bank. As investors weigh each side’s stance, the Fed’s perceived capacity to lead the macro conversation is weakening.

There is also a deeper policy bind. The recent inflationary risks are not a result of overheating demand but are rooted in supply-side shocks — port congestion, declining container traffic, and potential cost pass-throughs from pending tariffs. Cutting rates in response could prove ineffective or even counterproductive: it won’t fix shipping lanes or neutralize import taxes, but it could accelerate inflation expectations.

To make matters more complex, an early rate cut might be interpreted as a concession to political pressure — validating Trump’s criticism and potentially compromising the Fed’s hard-won image of institutional independence.

In short, Powell is walking a narrow path: economic caution on one side, systemic credibility on the other.

Inflation Expectations: A Warning Signal

Perhaps the strongest argument against near-term rate cuts lies in inflation expectations, which are climbing across the board.

• Consumer year-ahead inflation expectations surged to their highest level since 1981.
• 5- to 10-year expectations rose to 4.5%, the highest since 1991.
• The Atlanta Fed’s year-ahead expectations hit their highest since 2023.
• Dallas Fed manufacturing and services outlook indexes also moved higher.

Even though the US five-year breakeven remains anchored near 2.5%, the trend in consumer sentiment suggests mounting price anxieties — especially among households.

In this environment, premature easing could undermine long-term inflation credibility — a risk the Fed is clearly not willing to take.

Labour Market Still Resilient

Despite darkening sentiment, the jobs market continues to show strength. The U.S. added 177,000 jobs in April, and Powell described labour conditions as “solid.”

That said, Powell acknowledged the lag between sentiment and hard data, and said the Fed will keep monitoring whether businesses begin freezing hiring or cutting investment — especially in light of the tariff overhang.

Dissent and Debate

While the May vote was technically unanimous, it is worth noting that Christopher J. Waller, who had previously favoured reducing the pace of balance sheet shrinkage, was not fully aligned with the current majority. Meanwhile, Neel Kashkari voted as an alternate.

Although no formal dissent occurred, the internal balance of views may shift if inflation remains elevated or growth slows sharply in the coming months.

What Comes Next?

The June meeting now looks like a placeholder. The Fed wants time — and data — before taking any action. The July or September meetings are more realistic candidates for a first cut, if warranted.

Key variables the Fed will watch include:

• Core PCE and CPI data (especially services inflation)
• Labour market tightness
• Consumer and business sentiment
• Clarity on U.S. trade policy

Until then, the Fed remains in a holding pattern, carefully navigating the space between inflation control and recession risk.

Final Takeaway

Markets may be betting on rate cuts, but the Fed isn’t ready to commit. Inflation expectations and policy uncertainty are keeping the FOMC cautious. Barring a sharp turn in data, Powell is in no rush — and wants Washington to resolve the tariff-related uncertainty first.

Beyond the data, the stakes are increasingly institutional. Any premature rate cut would not only risk fueling inflation expectations, but could also be seen as a concession to political pressure. In resisting both market and White House demands, Powell is asserting the last vestiges of central bank independence — a principle now under unprecedented strain.

Next FOMC meeting: June 18, 2025
Market pricing: 55% odds of a 25 bps cut in July, three cuts still expected by year-end.