The Federal Reserve kept interest rates unchanged at 4.5% on Wednesday, with forecasts of higher inflation and slow economic growth. The Fed also forecasted 2 rate cuts later this year as uncertainties continue to raise concerns.
Powell’s Cautious Approach
The FOMC has kept rates unchanged at 4.5% since December 2024, as financial markets expected no rate changes. The committee’s dot plot showed 2 rate cuts still planned for 2025 but has reduced expectations for more cuts throughout 2026 and 2027. This could translate to a 100-basis point cut with the Fed Funds Rate forecasted to reach 3.4% by 2027. ⁽¹⁾
Source: Federal Reserve: Dot Plot Chart Showing Rate Paths. X-Axis Represents Current Rate While Y-Axis Represents Future Rate Forecasts
In the chart above, each dot represents 1 out of the 19 FOMC members stating their forecasts for interest rates. Seven FOMC members expect no rate cuts in 2025.
Fed Chair Powell stated during the press conference that the Fed will remain patient and remains well-positioned to monitor upcoming economic data before making any moves on monetary policy. Powell also acknowledged the risks of inflation due to tariffs but does not see any impact yet. Powell stated that energy prices could rise due to the ongoing tensions in the Middle East. ⁽²⁾
Economic Outlook: Higher Inflation and Slow Growth Ahead
FOMC policymakers also issued updated quarterly rate projections and economic forecasts, the first since Trump unveiled sweeping tariffs on US trading partners. Many of which he has since pulled back or delayed.
Officials raised their estimates for inflation at the end of 2025 to 3% from 2.7%. Core PCE is forecasted to rise to 3.1% from the previous revision of 2.8% in 2025. ⁽³⁾
Forecasts have been revised downwards for economic growth in 2025 to 1.4% from 1.7% as risks from global trade uncertainties and geopolitical tensions intensify. The unemployment rate is forecasted at 4.5% by the end of the year, up slightly from their previous estimate. ⁽⁴⁾
Trump’s Push for Rate Cuts
US President Trump has repeatedly demanded lower rates, criticizing Powell and pushing for a 200-basis point cut. Trump states that lower interest rates could help with the US government’s payment of the $36 trillion debt as low interest payments help ease pressures.
However, the Fed remains cautious as the central bank is still concerned over higher inflation driven by Trump’s tariffs. Price data has shown a small impact from tariffs due to weaker consumer sentiment.
Ongoing negotiations between the US and nations targeted with tariffs, plus a less aggressive trade tone from Trump have reduced uncertainties, but the Fed remains on alert.
Challenges Remain for the Fed
Fed officials have warned the central bank may confront challenging trade-offs if tariffs drive up inflation and damage economic growth. Growing inflationary pressures suggest Fed policy should keep rates elevated, while weakening growth calls for stimulus through lower rates.
Recent labor market data shows layoffs are on the rise. Long-term unemployment is too, while consumers are spending less. Retail sales tumbled nearly 1% in May, and recent data has reflected a cooling housing market. ⁽⁵⁾
Fed officials must also try to assess Trump’s policy changes in other areas. The tax and spending bill working its way through Congress would fulfill some of Trump’s most prominent economic priorities but would widen the US deficit over time and expand economic growth.
