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The Federal Reserve kept interest rates unchanged on Wednesday, maintaining the benchmark rate at 4.25%-4.50%. While policymakers still forecast rate cuts in 2025, Fed Chair Jerome Powell cautioned against certainty, citing inflation risks tied to upcoming Trump administration tariffs.
Powell emphasized that future policy decisions remain data-dependent, with economic projections showing slowing growth and rising inflation. The Fed now expects GDP growth to slow to 1.4% in 2025, unemployment to rise to 4.5%, and inflation to hit 3%, driven in part by import tariffs. Powell warned that these tariffs will likely create a "meaningful" inflation surge as the burden shifts from manufacturers and retailers to consumers.
Though the Fed still anticipates two rate cuts in 2025, it scaled back its outlook for 2026 and 2027 to just one cut per year. Seven out of 19 officials see no rate cuts ahead, underscoring internal disagreement over inflation risks and labor market strength.
Despite Trump's public criticism of Powell and demands for immediate rate cuts, the Fed remains cautious, preferring to observe the impact of tariff-driven cost pressures. Powell dismissed political pressure, saying the Fed is positioned to react based on data, not rhetoric.
Stock markets remained flat, and Treasury yields were largely unchanged. Futures trading continues to price in a potential rate cut by the Fed’s September meeting.
While labor conditions remain stable, the Fed’s outlook reflects stagflation risks: lower growth alongside persistent inflation. Powell noted that tariff uncertainty and geopolitical tensions—like the Israel-Iran conflict—complicate the inflation outlook, reinforcing the Fed's wait-and-see stance.
The central bank remains focused on returning inflation to its 2% target, even amid volatile global and domestic policy developments.
