The Fed is holding interest rates steady as inflation cools and spending slows

The Federal Reserve is staying on pause again, holding interest rates steady as spending cools off and inflation inches closer to its 2% goal.

On Friday, Commerce Department data revealed that consumer prices rose 2.1% in April compared to a year earlier, down from 2.3% in March.

That puts inflation within touching distance of the Fed’s target, but officials aren’t ready to change course just yet, especially not while President Donald Trump is ramping up tariffs.

According to Reuters, Fed officials are choosing patience, not action. The risk of cutting rates too early while tariffs continue to raise import costs is just too high. And they’re not convinced inflation is going to stay low either.

Goods prices are already rising again, which means businesses are likely passing costs from higher import taxes straight to consumers. Olu Sonola, head of US economic research at Fitch Ratings, said the April inflation dip will probably be seen by the Fed “as the calm before the storm.” He said unless consumer spending collapses or job losses spike, the central bank will keep waiting.

Fed freezes as tariffs drive caution

On the same day the inflation data came out, the government also reported that consumer spending only grew 0.2% in April. That’s weak. Meanwhile, the personal saving rate jumped to 4.9%, up from 4.3%. Households are saving more and spending less, likely because tariff policy changes so frequently that people are bracing for whatever comes next.

Karim Basta from III Capital Management put it simply: “There’s nothing to do but wait.”

Since December, the Fed has held short-term rates between 4.25% and 4.50%. And after their most recent meeting in May, officials made clear they’re focused on inflation. Multiple policymakers said they’re worried that Trump’s tariffs could wipe out any progress on prices.

Mary Daly, President of the San Francisco Fed, said on Thursday that inflation is still above target. “Inflation is going to be my focus,” she said. Daly also emphasized that rates have to stay “moderately restrictive” to keep downward pressure on prices.

Later that evening, Lorie Logan, who leads the Dallas Fed, said it could be “quite some time” before the Fed knows if Trump’s trade policies will do more damage to jobs or prices. She said those risks are “in rough balance,” and that’s enough reason for the Fed to stay on hold.

Still, traders are betting that by September, the Fed will start cutting rates slowly. They expect the policy rate to land between 3.75% and 4.0% by the end of the year. But unless inflation drops hard or unemployment jumps, the Fed is showing no sign of blinking.

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