The US Federal Reserve left its key policy rates unchanged at 3.5-3.75 percent on Wednesday. While this was expected, Fed Chair Jerome Powell’s final policy review was not without a few surprises. For the first time in 34 years, the decision saw four dissenting votes, with one member arguing for a rate cut and three others opposing the use of ‘easing bias’ in the policy statement. The dissent vote came amid pressure from President Donald Trump to cut rates and it’s likely that the next Fed Chair, Kevin Warsh, will face the same pressure. Warsh has vowed to uphold the central bank’s independence, which Powell said was at risk. Even though Powell’s term as chair ends on May 15, he will remain on the Fed board as a governor until investigations against him are over, to ensure that the central bank makes decisions based on analysis rather than political outcomes.
The Fed meeting warned about the risks to inflation and growth from the Iran war. Acknowledging uncertainty due to the conflict, it held rates steady even as the global oil price benchmark tore past $126 a barrel. Lower rates boost the economy, but also tend to fuel inflation. Often, central banks raise rates when inflation is high and cut rates when the economy is weak, to encourage spending and investing. The US’s March inflation soared past the Fed’s 2 percent target to 3.3 percent—the highest since May 2024—while the country’s growth in the January-March quarter stood at a modest 2 percent, up from 0.5 percent in the previous quarter which was hampered by the longest federal government shutdown. Lastly, the largest economy’s unemployment rate stood at 4.3 percent, with hiring at its strongest pace in recent months. Yet, the Fed decided to hold rates while awaiting clarity on the Gulf conflict’s length.
The upcoming US-China summit on May 14 is also weighing heavy on global markets. Weeks ahead of it, Beijing rolled out restrictions on foreign companies seeking to shift sourcing of critical minerals and other goods away from China. Analysts see the move as undercutting the US’s effort to reduce supply-chain dependence on China. If such provocative regulations deepen, it can have a cascading effect on global supply chains at a time the world is already grappling with the consequences of war.