Fed keeps interest rates steady but sees two cuts for 2025

Washington — The Federal Reserve held interest rates steady on Wednesday and policymakers signalled borrowing costs are still likely to fall this year, but slowed the overall pace of expected future rate cuts in the face of estimated higher inflation flowing from the Trump administration’s tariff plans.

In new economic projections, policymakers sketched a modestly stagflationary picture of the US economy, with economic growth slowing to 1.4% this year, unemployment rising to 4.5% by the end of the year and inflation finishing 2025 at 3%, well above the current level.

While policymakers still anticipate cutting rates by half a percentage point this year, as they projected in March and December, they slightly slowed the pace from there to a single quarter-percentage-point cut in each of 2026 and 2027 in a protracted fight to return inflation to the central bank’s 2% target.

Under the new projections, inflation remains elevated at 2.4% through 2026 before falling to 2.1% in 2027 amid largely stable unemployment.

“Uncertainty about the economic outlook has diminished but remains elevated,” the Fed said in its latest policy statement, a modification of language used in May, at a more turbulent moment in the trade debate, when it said that the risk of both higher inflation and higher unemployment had risen.

Those outcomes were both embedded in the new projections, the Fed’s latest thinking about how President Donald Trump’s suite of economic policies is expected to shape the economy this year.

The 1.4% growth in output this year compares to the 1.7% rate seen in the last round of projections in March, and the 4.5% unemployment rate expected at the end of the year is up from the 4.4% projected in March. The rate as of May was 4.2%

So far, however, “the unemployment rate remains low, and labour market conditions remain solid”, the Fed said in its policy statement, which was approved unanimously.

It did not mention the sudden outbreak of hostilities between Israel and Iran and the risk that conflict posed to global oil or other markets.

Fed chair Jerome Powell said on Wednesday that Fed policymakers expect inflation in goods prices to go up over the course of the summer as the impact of Trump’s tariffs work their way to US consumers.

“We’ve had goods inflation just moving up a bit,” Powell told a news conference after the Fed’s rates announcement. “We do expect to see more of that over the course of the summer.”

Powell said it took time for tariffs to work through the goods chain of distribution, noting many goods being sold by retailers were imported months before tariffs were imposed.

“So we’re beginning to see some effects, and we do expect to see more of them over coming months,” he said. “We do also see price increases in some of the relevant categories, like personal computers and audio visual equipment and things like that attributable to tariff increases.”

The rate projections from Fed officials for this year at least are in line with recent market expectations for a quarter-percentage-point rate reduction as soon as the Fed’s September 16-17 meeting.

The central bank continues to ignore Trump’s call for immediate rate cuts, a move Fed officials feel would be counter to their effort to ensure inflation returns to their 2% target until key tariff changes are finalised and their effects are better understood.

As Fed officials were meeting on Wednesday, Trump called Powell “stupid” and said the policy rate should be slashed in half, the type of move usually reserved for severe economic emergencies.

The Fed’s current policy rate was set in the current 4.25%-4.50% range in December, and policymakers have been reluctant to commit to a timeline for further cuts given the volatility of US trade policy, and the difficulty of estimating how the burden of higher import taxes will be spread among consumers, importers, and producing nations.

Reuters