The US Federal Reserve has not changed its benchmark policy rate from 4.25-4.50%, flagging the ongoing uncertainty from President Donald Trump’s tariff-driven trade policy. The Fed maintained a “waiting” stance and warned that inflation could rise and growth could soften as tariff effects filter the economy.
The central bank currently forecasts GDP growth at 1.4% in 2025, down from its previous 1.7% forecast. The unemployment rate is expected to rise to 4.5%, with inflation projected to touch 3% (well above current levels), raising new concerns about the US potential stagflation scenario.
Federal Reserve Chairman Jerome Powell noted that inflation could accelerate in the coming months as tariff impacts become more prominent at consumer prices. However, inflation data in May provided some easing. Contrary to sharp expectations, the Consumer Price Index (CPI) rose 0.1% per month, up 2.8% year-on-year.
Economists believe that the current US macro environment is complex, but marked by slowing growth and sticky inflation, strong employment data, measured wage growth and stable monetary policy reduce the immediate risk of stagnation.
Impact on India
India is relatively insulated from the US economic slowdown given its domestic demand-driven growth model. According to a report by Goldman Sachs, exports accounted for only about 12% of India’s GDP, while China accounted for 19% and Vietnam 82%.
However, despite India’s economic insulation, its stock markets are closely correlated with the US. Goldman Sachs says that the movement of India’s Nifty 50 Index has shown strong relationships with the S&P 500 compound index over the past decade, reflecting the interconnected nature of global capital markets.
A long-term Fed moratorium could slow interest rate cuts by other central banks, including the Reserve Bank of India (RBI), and could tighten global liquidity. Analysts also point to the growing interest of FPI in India due to weaker US dollars and India’s strong economic foundations.
