The Fed Keeps Rates Steady While They Wait for a Clear Signal

At this week’s FOMC meeting, the Federal Reserve held interest rates steady at 4.25%–4.50% for the third consecutive meeting, highlighting the growing tension between the conflicting risks of higher inflation and higher unemployment.

Fed officials noted that uncertainty about the economic outlook has increased, further complicating the timing and direction of future policy decisions. Inflation has moderated from its peak but remains persistent in key service sectors. Meanwhile, the labor market—though gradually cooling—continues to show resilience by historical standards.

The Fed is in a uniquely difficult position. With tariff policy capable of shifting on a moment’s notice, they’re struggling to determine which risk poses a greater threat: rising consumer prices or increasing unemployment and a broader economic slowdown. Each path demands a different policy response—and the lack of clarity makes inaction the most prudent short-term choice for the committee.

This moment of ambiguity defines the Fed’s balancing act. Until the data delivers a clearer signal, the Fed is choosing caution over premature action.

 Key Positives in Today’s Economy: Although the U.S. economy contracted at an annualized rate of 0.3% in the first quarter of 2025, the decline was largely driven by a surge in imports ahead of newly announced tariffs, which widened the trade deficit and masked strength in underlying domestic demand. Despite the headline number, the Federal Reserve highlighted several areas of resilience during its May 7 meeting:

Stable Labor Market: The unemployment rate remained steady at 4.2% in April, with the economy adding 177,000 nonfarm payroll jobs. Job growth was particularly notable in health care, transportation and warehousing, and financial services.

Wage Growth Remains Balanced: Average hourly earnings rose by 6 cents to $36.06 in April—a 0.2% monthly increase and 3.8% year-over-year gain. This pace is viewed as supportive of consumer spending while avoiding concerns of a wage-price inflation spiral—striking a balance that aligns with the Fed’s goals.

Robust Private Domestic Demand: While headline GDP was negative, real final sales to private domestic purchasers—a core measure of demand—rose by 3.0% in Q1 2025 on an annualized basis, reflecting healthy consumer and business activity despite external trade distortions.

Oil Prices at Multi-Year Lows: Crude oil prices have declined significantly, with WTI crude trading at $58.06 per barrel as of May 7, 2025. This pullback is easing transportation and production costs and could help suppress inflation in the months ahead.

Market Response: Following the Fed's announcement, major U.S. equity indices closed higher. The S&P 500 has gained approximately 13% since April 8, 2025, which is days after President Trump announced new tariffs on the world—an event dubbed “Liberation Day.”

Powell’s Key Takeaways

Fed Chair Jerome Powell struck a cautious, balanced tone during his May 7 press conference—underscoring both the Fed’s data dependence and its deep uncertainty about the direction of the economy. Here were his most notable takeaways:

No Timeline for Cuts: Powell emphasized that the Fed is not confident enough in the disinflationary trend to begin cutting rates. While a rate cut is still possible later in 2025, “we do not expect it will be appropriate to reduce the target range until we have greater confidence that inflation is moving sustainably toward 2%.”

Inflation Progress Has Stalled: Powell acknowledged that recent data has been disappointing, stating, “The lack of further progress in reducing inflation in the first quarter was notable.” Core PCE inflation remains elevated, and price pressures in services continue to be sticky.

The Fed Is in No Rush: In Powell’s words: “We don’t have to be in a hurry.” The strength of the labor market gives the Fed breathing room to hold rates steady while assessing incoming data. Policymakers are willing to wait rather than risk easing prematurely.

Tariff Uncertainty Adds Complexity: While Powell avoided direct commentary on trade policy, he acknowledged that external shocks and geopolitical developments are adding “considerable uncertainty” to the outlook—implicitly referencing the impact of recent tariff announcements.

Labor Market Still Strong, But Watching Closely: Powell reaffirmed that job growth and wage gains remain healthy, but signs of softening will be monitored closely. “We’re attentive to the risks on both sides of our mandate,” he said—highlighting the Fed’s balancing act between overheating and downturn.

In Summary

Like the black smoke that signals indecision in a papal conclave, the Fed’s message this week is simple: not yet—on interest rate cuts.

Policymakers are still waiting for a clear signal—be it from inflation, employment, or tariff resolution—before they move decisively. Until then, ambiguity and patience remain the prevailing message.

That said, it often feels like the Fed shows up late—whether hiking or cutting. And while the President’s recent criticism of Chair Powell lacked tact, he may not be wrong that the Fed should act preemptively—before the economy suffers from "smoke inhalation" waiting for a perfect signal.

And of course, I’d be remiss if I didn’t close with a favorite quote from the Oracle of Omaha—Warren Buffett, who announced his retirement this week:

“The most important quality for an investor is temperament, not intellect.”

I also encourage you to read my partner Dane Czaplicki’s thoughtful piece on Buffett’s retirement and legacy—a timely reflection on purpose, humility, and the long view.

As always, if you'd like to talk through your strategy or get a second opinion, we’re here to help.

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About the Author – Tim Macarak CFP®

Tim Macarak is President & Head of Wealth Management at Member’s Wealth, a boutique wealth management firm that offers a comprehensive approach to serving individuals, families, business owners, and institutions. The firm’s goal is to preserve and grow its clients’ wealth to endure overtime, while thoughtfully evolving its strategy to suit an ever-changing world. With over 20 years of wealth management experience, Tim and the Members' Wealth team thrive on bringing clarity and confidence to clients' unique situations. He believes everyone needs sound financial advice from someone whose interests are aligned with theirs and is determined to put service before all else.

Tim is a CERTIFIED FINANCIAL PLANNER® Professional. Outside work, he enjoys spending time with his wife and kids, Skiing, Coaching, and Traveling. To learn more about Tim, connect with him on LinkedIn.

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