The U.S. central bank held interest rates steady on Wednesday, but policymakers still anticipate cutting borrowing costs later in 2025. However, Federal Reserve Chair Jerome Powell cautioned against overemphasizing this outlook, stating he expects “meaningful” inflation ahead due to the Trump administration’s planned import tariffs.
Powell emphasized that future rate decisions will be “data-dependent,” acknowledging that policymakers’ rate path projections are not set in stone. This comes after the central bank adjusted its overall outlook for rate cuts due to a more challenging economic forecast, which includes weaker growth, rising unemployment, and faster price increases.
Powell indicated that rate cuts might have been considered given recent low inflation readings if it weren’t for the tariffs. However, he insisted that a cost shock is imminent, as producers, manufacturers, and retailers are still grappling with who will bear the cost of existing levies. Furthermore, President Donald Trump is contemplating aggressive new import duties that could take effect next month.
“Everyone that I know is forecasting a meaningful increase in inflation in coming months from tariffs, because someone has to pay for the tariffs,” Powell explained. He added that the cost will ultimately fall, in part, on the end consumer. The Fed prefers to wait and observe the actual “pass-through of inflation” from these higher import taxes before making further policy adjustments.
New economic projections released by the Fed paint a somewhat stagflationary picture for the economy. For 2025, they project growth to slow to 1.4%, unemployment to rise to 4.5%, and inflation to end the year at 3%, significantly above current levels.
While policymakers still expect to cut rates by half a percentage point this year, they’ve slightly slowed the pace for 2026 and 2027, anticipating a single quarter-percentage-point cut in each of those years. This reflects a protracted effort to bring inflation back to their 2% target. A split among the 19 policymakers also emerged, with seven believing no rate cuts will be necessary. Powell attributed this divergence to the “very foggy time” of uncertainty surrounding Trump’s tariff policy and differing assessments of inflation and labor market risks.
Under these new projections, inflation is expected to remain elevated at 2.4% through 2026 before dipping to 2.1% in 2027, with generally stable unemployment. The projected 1.4% GDP growth for this year is down from the 1.7% forecast in March, and the 4.5% unemployment rate for year-end is up from March’s 4.4%. The unemployment rate in May was 4.2%.
Despite these concerns, the Fed stated that “the unemployment rate remains low, and labor market conditions remain solid,” keeping its benchmark overnight interest rate in the 4.25%-4.50% range unanimously. Jack McIntyre, a portfolio manager at Brandywine Global, noted a “bias towards some version of stagnation, lower growth with rising sticky inflation,” and felt the Fed is “still being very patient” but “biased towards cutting rates in the near future.”
The Fed’s statement did not address the conflict between Israel and Iran or its potential impact on global oil markets. Powell acknowledged the Fed is monitoring the situation, but believes that while energy prices might rise, such spikes typically fade without lasting inflationary effects.
“For the time being, we are well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance,” Powell asserted.
U.S. stock indexes remained largely flat, and the 10-year Treasury yield was mostly unchanged. Futures prices continue to suggest the Fed’s September 16-17 meeting is the most likely time for the next rate cut, with another reduction expected by the end of 2025.
The central bank’s decision again disregarded Trump’s calls for immediate rate cuts. Fed officials believe such a move would hinder their efforts to bring inflation back to target until the effects of key tariff changes are fully understood. On Wednesday, Trump publicly criticized Powell, calling him “stupid” and suggesting the policy rate should be halved, a move usually reserved for severe economic emergencies. He also mused about appointing himself as Fed chief.
The Fed had cut rates three times last year, with the last reduction in December. However, policymakers have been hesitant to commit to a timeline for further cuts given the unpredictable nature of U.S. trade policy and the difficulty in estimating how the burden of higher import taxes will be distributed among consumers, importers, and producing nations.
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