A solid labor market has for months given the Federal Reserve comfort that it could hold off on interest rate cuts until it had more clarity about how President Trump’s policies would impact the economy. New data released on Friday reinforced that patient approach.
Officials at the central bank are widely expected to keep interest rates steady when they announce their next decision on May 7. After lowering interest rates by a percentage point last year, the Fed has since January opted against making additional reductions. That has left interest rates at a range of 4.25 percent to 4.5 percent.
Until this point, officials have felt little urgency to lower interest rates because the economy so far has stayed on solid footing. Mr. Trump’s attempts to reset global trade relations through steep tariffs now risk upending that.
Despite the president’s decision in April to temporarily pause more stringent levies from taking effect on nearly all of the country’s trading partners, businesses have struggled to navigate the uncertainty. Many have shelved big investments and slowed hiring, and some are already raising prices. Surveys suggest that consumers also have turned much more downbeat about the outlook, fueling concern that this pessimism will eventually translate to less spending.
The fear is that consumers will cut back so aggressively that businesses will be forced to lay off workers, worsening the economic slowdown. Jerome H. Powell, the chair of the central bank, has warned that in addition to denting growth, tariffs of the nature Mr. Trump is pursuing also risk stoking inflation.
That combination risks putting the Fed in a bind. The central bank is responsible for fostering low, stable inflation as well as a healthy labor market. Officials are now having to game out what they would do if their goals for the economy come into tension with one another.
The latest jobs report, which showed better-than-expected monthly payrolls growth and a steady unemployment rate, is welcome news for officials. It follows inflation data earlier this week that confirmed that in March, price pressures stayed somewhat subdued even as it remained above the Fed’s 2 percent target.
Officials are now debating whether the forthcoming surge in consumer prices will just be a temporary adjustment that fades over time, or if it will lead to persistently higher inflation.
Having just grappled with surging inflation in the aftermath of the pandemic, the Fed has stressed the importance of ensuring that tariff-related price pressures do not mushroom into a bigger problem. Last month, Mr. Powell said that containing inflation was crucial to fostering a healthy labor market.
“Without price stability, we cannot achieve the long periods of strong labor market conditions that benefit all Americans,” he said at an event at the Economic Club of Chicago.
That emphasis suggests there is a high bar for the Fed to restart interest rate cuts. Officials will need to see clear evidence that the economy is weakening before taking action, something that could take time.
Christopher J. Waller, a governor, said in a recent interview that he did not expect tariffs to impact the economy in a significant way before July, suggesting no near-term cuts.
Preston Mui, a senior economist at research and advocacy group Employ America, said he expects the labor market to gradually slow over the next couple of months rather than sharply collapse.
“When it gets sharp is when you have these big spikes in layoffs,” he said. That will depend on what Mr. Trump does with tariffs. If the president reverses course by the self-imposed 90-day deadline in early July, the labor market may avoid a more painful hit. If tariffs remain in place, or the uncertainty around trade policy lingers, the damage could start to mount.
After Friday’s report, traders in federal funds futures markets scaled back their expectations for interest rate cuts from the central bank this year. They see much lower odds of a June reduction but continue to forecast a quarter-point cut in July. Over the course of the year, they see the Fed cutting at least three times.
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