In keeping interests rates as-is in May, the Federal Open Market Committee is walking a tightrope in trying to cool a still-hot economy while still trying to maintain a strong dollar, said Ryan Loy, extension economist for the University of Arkansas System Division of Agriculture.
In its May 7 meeting, the committee — better known as the Fed — kept its benchmark short-term rate at a range of 4.25% to 4.5% for a third straight meeting.
The context of that decision is important, Loy said.
“They’re trying to battle inflation to make sure that our growth stays up with the cost increase of things,” he said.
A lending rate is just one tool to do that, he said.
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“A strong dollar can also do that and that’s why restricted monetary policy is a thing,” he said.
Restrictive monetary policy involves maintaining an elevated federal funds rate to discourage investment and borrowing, with the goal of slowing inflationary pressures and stabilizing the economy. Constraining the supply of dollars and maintaining high interest rates strengthens the dollar relative to foreign currencies. A strong dollar improves global purchasing power of imports but simultaneously makes U.S. exports less competitive.
Loy said the Fed was at a crossroads, trying to navigate with an uncertain global financial map.
“Do we assume that the uncertainty from tariffs and export markets is going to be transitory, meaning those changes are going to be short lived, and they’re going to bounce back to normalized prices?” Loy asked. “If that’s the case, we can cut the rate and move forward.”
However, “if they cut it too early and inflation sticks around, and net export uncertainty continues through the rest of the year, and they have to raise it again, that could be a very costly mistake for them,” he said.
According to the federal Bureau of Economic Analysis, the nation’s GDP, or gross domestic product, shrank at an annual rate of 0.3% in the first quarter of 2025. BEA said that was “primarily reflecting an increase in imports and a decrease in government spending that were partly offset by increases in investment, consumer spending, and exports.”
The U.S. unemployment rate remained stable. The U.S. Bureau of Labor Statistics said total nonfarm payroll employment increased by 177,000 in April, and the unemployment rate was unchanged at 4.2%.
“The economy is still hot,” Loy said. “There’s data that shows us that the economy is still in a good place and still headed towards growth. We don’t want this GDP contraction in quarter one to be the reason that we change a rate because we could have growth next quarter.”
In its statement from its May meeting, the Fed said it will continue to pursue “maximum employment and inflation at the rate of 2% over the longer run.”
During the May meeting news conference, Fed Chairman Jerome Powell pointed to tariffs.
“The tariff increases announced so far have been significantly larger than anticipated. All of these policies are still evolving, however, and their effects on the economy remain highly uncertain,” he said. “Our obligation is to keep longer-term inflation expectations well anchored and to prevent a one-time increase in the price level from becoming an ongoing inflation problem.”
Looking ahead to the committee’s June meeting, Powell said that “depending on the way things play out, that could include … rate cuts. It could include us holding where we are. We just are going to need to see, you know, how things play out before we make those decisions.”
To learn about extension programs in Arkansas, contact your local Cooperative Extension Service agent or visit www.uaex.uada.edu.
Mary Hightower is with the University of Arkansas System Division of Agriculture.