Fed Tackles Inflation, Tariffs at May 2025 FOMC

Yeliz Akmaca — Thu, 29 May 2025 09:00:41 +0000

The Fed kept interest rates steady at the 4.25%-4.5% range at its May 6–7, 2025 meeting.
It emphasized that tariffs could increase inflation and trigger economic uncertainty.
Economic growth remains solid, and the labor market is balanced, but downside risks have increased.
U.S.-China tariffs were suspended, and bond yields continued to rise.

Federal Reserve Discusses Inflation and Tariff Risks

The U.S. Federal Reserve (Fed) made significant decisions during its Federal Open Market Committee (FOMC) meeting on May 6-7, 2025. Officials highlighted that tariffs could increase inflation, creating a challenging dilemma for interest rate policy. The minutes emphasized a cautious approach amid rising economic uncertainties. The Fed kept the federal funds rate steady at 4.25%-4.5%. Officials noted that economic growth remains solid, but risks of labor market weakening have increased. While consumers continue spending, concerns about persistent inflation have grown. Additionally, policy uncertainties are complicating the goals of full employment and low inflation.

The Fed expressed concerns about variability in trade policies. Tariffs between the U.S. and China eased after the meeting, with both sides suspending heavy taxes for a 90-day negotiation period. This supported a recovery on Wall Street. However, bond yields continued to rise. Powell defended the Fed’s independence against Trump’s pressure for rate cuts. The meeting also reviewed the Fed’s five-year policy framework. Officials evaluated the “flexible average inflation targeting” strategy, noting it could be ineffective during major inflationary shocks. No plans to change the inflation target were announced.

Trade Policies and Financial Stability Risks

The Fed discussed the volatile policies of the Trump administration. While tariffs were suspended, they were not fully lifted. Officials noted that bond market volatility could threaten financial stability. Rising Treasury yields may have long-term economic impacts. The risk of both inflation and unemployment rising was emphasized, potentially forcing the Fed into a tough choice between tight monetary policy and supporting growth. Additionally, the Fed renewed dollar and currency swap lines to support global financial stability, aiming to address liquidity needs.

Post-meeting, Trump delayed 145% tariffs on China, impacting bond yields and recession expectations. Consequently, markets do not expect a rate cut until the September meeting. The Fed is awaiting greater clarity due to policy uncertainties. Officials acknowledged the increasingly complex economic outlook. Inflation nearing the 2% target is making the Fed’s decisions more challenging. Financial market volatility is heightening recession risks. The Fed aims to both control inflation and support growth.

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DXY Plummets: PMI, Tariffs, and Bill Create Pressure

Yeliz Akmaca — Fri, 23 May 2025 16:00:10 +0000

US Dollar Index Sees Sharp Decline

The US Dollar Index (DXY) fell 10% from its 2025 peak, dropping to 99.40. The decline accelerated with Donald Trump’s inauguration. Tariffs imposed on allied countries like Canada and Mexico sparked market concerns. As a result, reciprocal tariffs announced on “Independence Day” intensified selling pressure. However, Moody’s downgraded the US credit rating to AA1 on Friday, stripping it of its last Triple-A rating. Moody’s joined S&P Global in 2011 and Fitch in 2023 in lowering the rating.

The House of Representatives passed the “Big Beautiful Bill” with a 215-214 vote. The bill extends the 2017 tax cuts, exempts overtime and tips from taxes, and removes millions from programs like Medicare. The Congressional Budget Office (CBO) estimates the bill will add $3.8 trillion to the deficit over 10 years, increasing the US’s $36.2 trillion debt. The budget deficit is expected to reach 7% of GDP. Consequently, Trump’s tariffs and fiscal health concerns are pressuring the USD.

DXY Technical Analysis and Market Dynamics

In the DXY’s daily chart, bullish momentum has weakened. The RSI’s decline has slowed. Support is at 99.10, with resistances at 100 (21 DMA), 100.80 (23.6% Fibonacci), and 101.35 (50 DMA). Without a new trigger, the downward pace may slow. However, investors remain cautious due to fiscal and tariff uncertainties. The Senate’s approval process for the bill will influence the USD’s direction.

Economic data has had limited impact on the DXY. Federal Reserve officials Susan Collins and Raphael Bostic indicated no rush to cut rates. Tuesday’s Conference Board consumer confidence report is critical. Recent data showed declining confidence due to labor market and inflation concerns. Still, markets are focused on debt growth and tariff effects.

Trump’s tariffs have shaken global investors’ confidence in US assets. Moody’s downgrade heightened debt sustainability concerns. As a result, gold prices surged 23% due to safe-haven demand. The EUR strengthened against the USD, reaching 1.138. Investors are questioning US fiscal policies and debt burdens. Fears that tariffs could slow economic growth are fueling the DXY’s decline. Markets are watching the Senate’s stance on the bill and the Federal Reserve’s rate decisions.

***NOT INVESTMENT ADVICE***