Fed Holds Rates Steady as Tariff Uncertainty Clouds Outlook

The Federal Reserve didn’t change interest rates today, and that part’s already priced in. No one was really betting on a surprise. But that doesn’t mean investors aren’t watching closely.

They are, and not because of rates. They’re looking for any hint of what’s coming next, as President Trump’s newest round of tariffs adds fresh complications to an already cloudy economic picture.

Trade Policy Takes Center Stage

Trump’s latest tariff package, the biggest one in decades, is already making waves. Manufacturing is starting to show strain, confidence is down among both consumers and businesses, and imports surged last quarter. That jump played a role in pushing GDP lower than expected. The U.S. economy shrank at a 0.3% annualized rate, though consumer spending still ticked up 1.8%.

The labor market still looks solid for now. April saw 177,000 jobs added, and the unemployment rate held steady at 4.2%. But the tariffs are hard to predict. Fed officials say they expect both inflation and unemployment to rise, but no one knows by how much or for how long. When trade policy keeps shifting, the Fed’s usual goals of price stability and maximum employment don’t align neatly.

Investors Brace for Volatility

Markets aren’t loving the uncertainty. The S&P 500, Dow, and Nasdaq all moved lower heading into the Fed’s meeting. Tech stocks got hit the hardest. But this isn’t just about interest rates. It’s the tariff headlines, the back-and-forth tone on trade, and the sense that this might not be over. Trump’s move to slap a 100% tariff on imported films, followed by his refusal to meet with China’s president, didn’t do anything to calm nerves.

At this point, most investors think the Fed won’t start cutting rates until July at the earliest, maybe not until December. There’s still too much noise. Futures markets gave a rate cut this week less than a 5% chance. Some economists think the Fed could act earlier if job growth falters, but for now, the strategy seems to be wait, watch, and reassess later.

Corporate Earnings: Winners and Losers

Several big U.S. companies are feeling the squeeze. McDonald’s (NYSE: MCD), General Motors (NYSE: GM), and others have flagged rising import costs as a problem. They’re warning that profits are being pinched, and that some of those cost increases may be passed on to consumers, which could eat into demand. Delta Airlines (NYSE: DAL) took it a step further, pulling its financial guidance altogether, saying it can’t make reliable forecasts with so much up in the air.

Not every company is struggling, though. Palantir (NASDAQ: PLTR) raised its full-year guidance, pointing to steady demand for its AI software, even as other tech firms stumbled. Microsoft (NASDAQ: MSFT) launched a new round of PCs aimed at budget-conscious buyers, emphasizing lower prices and longer battery life. Maybe that’s a nod to the current mood. Still, market sentiment feels cautious. Options traders don’t seem to be betting on any near-term upside.

FIGURE 1: US Federal Reserve – Selected Interest Rates

Source: www.federalreserve.gov

What the Fed Is Watching

Fed Chair Jerome Powell has said the Fed is keeping a close eye on whether tariff-driven inflation becomes something more permanent. So far, it hasn’t, but the concern is there. The Fed’s last projections called for two rate cuts this year, though those assumptions already feel a bit outdated.

Inside the Fed, some, like Governor Christopher Waller, are outlining possible paths. One scenario is a slow pace of rate cuts if the tariff situation improves. The other is a more aggressive action if trade tensions persist. But the baseline right now is to stay put and wait for more clarity. The Fed’s next official forecasts won’t arrive until June, so markets will be dissecting Powell’s comments today for any indication of a shift in thinking.

Investment Takeaways

The main thing for investors is, uncertainty is back. The Fed probably won’t cut rates anytime soon, and trade policy is hard to predict. Companies with exposure to global supply chains, like automakers, airlines, and fast food chains, are feeling the pressure. Tech and AI-focused firms might be a little more shielded, but even there, it’s shaky.

There’s room for more volatility over the next couple of months. The Fed is trying to weigh inflation risks against signs that growth could be slowing. Rate cuts are still possible later this year, but nothing’s locked in. It all depends on how trade plays out and whether the job market can keep holding things up.

For now, investors are stuck in a wait-and-see mode; there’s not much to do but sit tight and wait for more signals from the Fed.