Fed holds rates steady and adopts ‘wait-and-see' stance on trade war
KUWAIT: The US services sector expanded in April with the ISM PMI coming in at 51.6, lifted by new orders and inventories, though employment contracted, and tariff-driven price pressures hit a 27-month high. The Federal Reserve held rates steady at 4.25 percent-4.50 percent, citing trade uncertainty as aggressive tariffs risk stagflationary pressures, while unemployment claims dipped to 228,000.
A preliminary US and UK trade deal eased auto/agricultural tariffs, signaling cautious de-escalation, though existing China tariffs remain. The Bank of England cut rates to 4.25 percent to counter slow growth, while China's services sector came in at 50.7 amid weak exports and rising costs. Japan's services PMI rose to 52.4 on stronger demand, but input costs surged and optimism declined. Globally, central banks tread carefully as trade tensions inflame inflation risks while suppressing growth, leaving markets balancing fragile optimism against looming stagflation threats.
The ISM Services PMI in the US rose to 51.6 in April 2025, up from 50.8 in March and beating expectations of 50.2, signaling a stronger expansion in the services sector. Growth was driven by faster increases in new orders and inventories, while business activity remained positive despite a slight slowdown. Employment continued to shrink, though at a slower rate, and supplier delivery times lengthened. Price pressures surged to their highest level since February 2023. Concerns over tariff-related price impacts and federal budget cuts persist, but overall conditions are improving, according to ISM's Steve Miller.
Federal funds rate
In its latest policy meeting last Wednesday, the Federal Reserve opted to keep interest rates unchanged at 4.25 percent to 4.50 percent, emphasizing a cautious 'wait-and-see' approach as trade tensions cloud the economic outlook. Chair Jerome Powell highlighted that while the economy and labor market remain broadly solid, the Fed will refrain from adjusting rates until it gathers more clarity on the evolving impact of recent tariff policies. The decision comes amid a surge in imports aimed at beating new tariffs, a trend that may have distorted Q1 GDP figures.
Powell pointed to the Trump administration's aggressive trade measures as a major source of economic uncertainty, warning that rising tariffs risks pushing inflation higher while simultaneously slowing growth, an unfavorable scenario that could leave the Fed's dual mandate out of reach. Meanwhile, President Donald Trump hinted that there will be a deal with a 'big' country announced on Thursday, adding that he would not lower tariffs on China as a condition to begin negotiations. Markets reacted positively on Wednesday with the Dow Jones, S&P 500, and Nasdaq indices ending the trading day with positive gains.
Unemployment claims
US jobless claims decreased by 13,000 to a seasonally adjusted 228,000 for the week ending May 3rd, following a prior week surge partly due to a 15,089 jump in unadjusted claims in New York. This previous increase was linked to layoffs across transportation, warehousing, hospitality, public administration, and education sectors. President Trump's tariffs include a significant hike to 145 percent on some Chinese imports. Federal Reserve Chair Jerome Powell noted that these 'significantly larger than anticipated' tariff increases could lead to a rise in inflation, a slowdown in economic growth, and an increase in unemployment, with the current Fed benchmark interest rate remaining in the 4.25 percent-4.50 percent range.
Trump speaks
President Trump announced a trade agreement framework with the UK, seen as a potential model for easing US tariffs. While details are still being finalized, the deal includes reduced tariffs on UK cars and agricultural products, and a joint tariff on steel and aluminum, with pharmaceutical exemptions. However, it's more of a 'letter' of understanding than a comprehensive deal, and existing universal tariffs remain. The announcement, which surprised some UK officials, was met with positive market reactions, though analysts note the limited scope and potential for only small economic gains for the UK.
Trump emphasized that this is the first of many upcoming trade deals. Simultaneously, the US is engaging with China, with upcoming meetings aimed at de-escalating trade tensions, despite Trump's refusal to lower existing tariffs beforehand. These developments are viewed as potential signs of de-escalation in Trump's broader trade policies, which have drawn criticism from economists and global institutions concerned about their negative impact on the global economy and potential for a US recession.
The greenback was last seen trading at 100.339.
UK official bank rate
Amidst a sluggish economy and concerns over President Trump's trade policies, the Bank of England (BoE) lowered its main interest rate from 4.5 percent to 4.25 percent on Thursday. This decision, anticipated due to easing inflation (down to 2.6 percent in March), aims to ease financial pressures for borrowers, businesses, and consumers. While five of the nine policymakers supported the 0.25 percent cut, some favored a larger reduction, and others preferred no change. The BoE highlighted the increasing uncertainty in global trade due to tariffs, noting a weakened outlook for global growth, though expecting a smaller impact on the UK. This rate cut is expected to stimulate investment, spending, and housing activity, benefiting those with loans but potentially disadvantaged savers. The GBP/USD currency pair was last seen trading at 1.3304
China services PMI
China's Caixin Services PMI fell to 50.7 in April 2025 from 51.9 in March, missing expectations and marking the weakest growth since September. New orders rose at the slowest pace in over two years, hindered by US tariffs affecting goods trade. Export growth was minimal, while employment fell for the second month amid rising cost pressures. Input costs rose sharply due to higher wages and materials, but output prices declined for the third straight month as firms tried to stay competitive. Business confidence dropped to its second-lowest level since records began in 2005, reflecting concerns over trade policy shifts. The USD/CNY currency pair was last seen trading at 7.2364
Japan services PMI
The au Jibun Bank Japan Services PMI for April 2025 was revised up to 52.4 from 52.2, indicating continued expansion for the sixth straight month and improving from March's neutral 50.0. New orders rose at the fastest rate in nearly a year, supported by ongoing, though slower, overseas demand. Hiring accelerated to its quickest pace since January, while backlogs increased modestly. Input costs surged at the fastest rate since February 2023, and output prices rose as firms passed on some costs. Despite this growth, business optimism dropped to its lowest since January 2021 due to concerns over global trade, labor shortages, and inflation. The USD/JPY currency pair was last seen trading at 145.34
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