Federal Reserve Holds Rates, Sees Inflation Rising \ Newslooks \ Washington DC \ Mary Sidiqi \ Evening Edition \ Federal Reserve officials expect inflation to rise due to tariffs but still forecast two interest rate cuts by year’s end. The central bank held rates steady for a fourth time, while projecting slower growth and higher unemployment. Chair Powell emphasized a cautious, data-driven approach amid pressure from President Trump.
Quick Looks
- Policy hold: Fed keeps key rate at 4.25–4.5% for fourth meeting.
- Economic outlook: Sees 1.4% GDP growth, 4.5% unemployment by year-end.
- Inflation forecast: Core PCE could peak at 3–3.1%, above 2% target.
- Rate cuts: Two 25‑point cuts still anticipated in 2025.
- Tariff concern: Powell cites potential inflation from ongoing trade duties.
- Political pressure: Trump continues to demand aggressive rate cuts.
- Global context: U.S. holds, while ECB, BoC, BoE have cut rates.
- Market expectations: Investors eye potential September rate move.
Deep Look
The Federal Reserve, in a widely anticipated move, opted to leave its benchmark interest rate unchanged for the fourth consecutive meeting, holding firm as it navigates a complex economic landscape shaped by resilient domestic growth, evolving inflationary dynamics, and mounting geopolitical trade tensions. Despite warning of higher inflation in the coming months—largely attributed to new tariffs introduced by President Donald Trump—the Fed reiterated its projection for two interest rate cuts by the end of 2025, maintaining the same outlook it issued in March.
Fed Chair Jerome Powell emphasized the importance of remaining patient and data-driven. He noted that although current economic indicators remain solid, the central bank anticipates a “meaningful amount of inflation” emerging in the second half of the year. This forecast comes amid growing concerns among policymakers that new trade tariffs could ignite price pressures across multiple sectors, echoing the inflationary surge that rattled markets and households just a few years ago.
The Federal Reserve’s updated quarterly projections indicate a less optimistic outlook for economic growth. GDP is now expected to grow just 1.4% in 2025—down sharply from 2.5% the previous year—suggesting that higher interest rates and uncertainty from trade policy are weighing on investment and consumer spending. At the same time, the unemployment rate is projected to rise modestly to 4.5% from 4.2% today, signaling a slight softening in labor market conditions. Perhaps most concerning to policymakers is the outlook for inflation: the Fed’s preferred measure, the core personal consumption expenditures (PCE) index, is expected to climb to 3% by year’s end, well above the central bank’s 2% target.
These economic adjustments come just months after President Trump announced sweeping tariffs on a range of imported goods in early April. Although a significant portion of those duties were postponed a week later, they have already begun to influence inflation forecasts. Speaking at a post-meeting press conference, Powell acknowledged that these tariffs are likely to increase prices and depress economic activity, depending on how many are implemented and for how long. The current “pause” on many of those duties is scheduled to expire on July 9, unless trade agreements are reached with key global partners.
Despite these inflationary warnings, headline inflation has moderated in early 2025. April’s inflation rate stood at 2.1%, nearly back to the Fed’s long-term target. However, core inflation, which strips out the more volatile costs of food and energy, remained stubbornly high at 2.5%. Fed officials, while encouraged by the recent cooling, believe the trend may not last, especially if tariffs reintroduce supply chain disruptions and drive up costs for businesses and consumers alike.
Powell reiterated that the central bank’s strategy is “forward-looking” and emphasized the importance of not acting prematurely. “Because the economy is still solid, we can take the time to actually see what’s going to happen,” he said. He stressed that clarity on the full effect of tariffs is essential before the Fed makes any further policy moves, including rate reductions. The Fed’s approach underscores its cautious balancing act: remaining flexible to support growth while ensuring inflation does not become entrenched again.
Political pressure, however, continues to mount. President Trump, a vocal critic of Powell’s leadership, escalated his rhetoric again this week, calling the Fed Chair “stupid” and accusing him of being politically motivated for resisting immediate rate cuts. Trump has long argued that the Fed should aggressively lower interest rates to stimulate the economy and, more recently, to reduce the federal government’s soaring borrowing costs—now running at an annualized rate of over $1 trillion. Economists have warned that allowing fiscal pressures to influence monetary policy would jeopardize the Fed’s independence and risk undermining its core mandate of price stability and full employment.
Globally, monetary policy dynamics are shifting. Central banks in Europe, Canada, and the U.K. have all cut interest rates in recent months in response to weakening economic conditions. The European Central Bank, in particular, has cited U.S. trade policies as a factor slowing its recovery. Meanwhile, the Bank of England has trimmed its benchmark rate twice in 2025 and is expected to keep it at 4.25% in its next meeting. The Bank of Japan held its short-term rate steady at 0.5% in June, following a rare rate hike earlier this year.
Despite these global shifts, the U.S. economy remains relatively stable. The job market continues to perform well, consumer demand is steady, and wage growth has cooled slightly but remains healthy. Housing, however, has shown signs of strain. Elevated mortgage rates have begun to slow both home sales and construction, revealing potential weak points if interest rates remain high for an extended period.
Ultimately, Powell and the Fed are signaling that patience remains their most valuable tool. While market participants eagerly watch for signals of imminent rate cuts, the central bank appears committed to understanding the full ramifications of Trump’s tariff strategy before making any moves. “We’ll make smarter and better decisions if we wait just a couple of months or however long it takes to get a sense of what is really going to pass through to inflation,” Powell said, reaffirming the Fed’s commitment to deliberate, measured policymaking amid economic uncertainty.
Federal Reserve Holds Rates
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