At its May meeting, the Federal Open Market Committee (FOMC) voted to leave the Federal funds rate unchanged at a target range of 4.25% to 4.50% for a third consecutive meeting. Despite some signs of policy-induced weakness emerging, the Fed remains committed to its “wait-and-see” approach and is in no hurry to make meaningful adjustments to policy until the ultimate form and impact of tariff policies become clearer.

While the decision to hold rates steady came as no surprise, changes to the statement language leaned hawkish.

• With a spike in imports weighing on economic activity during the first quarter, the statement “economic activity has continued to expand at a solid pace” is now preceded by “Although swings in net exports have affected the data.” This suggests that, despite the weak headline figure, the Committee was largely unfazed by the underlying details of the 1Q25 GDP report.
• “Uncertainty about the economic outlook has increased” from the March statement now states that “uncertainty…has increased further” after the April 2^nd tariff announcements and subsequent policy decisions have only added to the policy fog.
• Acknowledging the stagflationary impacts of tariffs, the Committee explicitly added that it “judges that the risks of higher unemployment and higher inflation have risen.” 

During the press conference, Federal Reserve Chairman Jerome Powell noted that tariffs, if implemented as communicated, could limit further progress towards inflation goals. Moreover, when asked which side of the dual mandate the Committee would prioritize should the risks of higher inflation and higher unemployment materialize concurrently, Powell avoided giving a straight answer. Instead, he noted that decisions would not be made preemptively and would depend on how far each variable is from its goal, and how much time it could take to return each to target. In response, short-term rate cut expectations turned modestly more hawkish, with the probability of a June cut falling from 32% to 23%, although roughly three full cuts are still expected by year-end.

Overall, Chair Powell emphasized that the Committee feels well-positioned to wait for more clarity before making any policy adjustments. As such, with the 90-day pause on reciprocal tariffs set to end in early July, the Committee could wait until its July meeting (at the earliest) to ease policy, giving it a greater sample of tariff-impacted data to assess.

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