The U.S. Federal Reserve kept interest rates steady on Wednesday but flagged rising inflation risks and signaled two rate cuts by the end of 2025 (Fed Holds Rates) . The warning came amid growing concerns over President Trump’s looming import tariffs, which are expected to push prices higher across consumer goods.
What happened?
- After a two-day policy meeting, the Federal Reserve left its benchmark interest rate unchanged at 4.25%-4.50%, as expected.
- Policymakers still foresee cutting rates twice in 2025, but the pace has slowed compared to earlier projections.
- New forecasts reveal a grimmer economic outlook, with growth in 2025 projected at just 1.4%, inflation at 3%, and unemployment climbing to 4.5%.
Why it happened?
- Fed Chair Jerome Powell emphasized that planned tariffs by the Trump administration could spark a “meaningful” inflation surge, even though recent inflation readings have been low.
- Powell warned that someone must bear the cost of tariffs—manufacturers, retailers, or consumers—and ultimately, end consumers will likely face higher prices.
- Without the tariffs, Powell indicated, rate cuts might already be appropriate due to softer inflation data.
“Everyone is forecasting a meaningful increase in inflation in the coming months from tariffs,” Powell stated.
- The divided opinion among Fed officials also reflects uncertainty, with seven out of 19 policymakers suggesting no rate cuts will be needed at all.
What’s expected?
- Inflation is expected to remain elevated: 2.4% through 2026, before dipping slightly to 2.1% by 2027.
- Rate cuts are likely to begin after the September 16-17 Fed meeting, depending on incoming data about the impact of tariffs.
- Trump’s aggressive rhetoric toward the Fed—including calling Powell “stupid” and suggesting he could install himself as Fed Chair—has added political pressure but has not influenced the Fed’s cautious stance (Fed Holds Rates).
Broader implications:
- The Fed chose not to factor in the Israel-Iran conflict or potential global oil disruptions in its decision, noting such spikes in energy prices are usually short-lived.
- Market reactions were muted: stock indices remained flat, and 10-year Treasury yields were stable.
- Interest rate futures continue to price in two cuts by end of 2025, aligning with the Fed’s projections.
“The Fed is in wait-and-watch mode,” Powell noted. “We’ll react as we learn more.”
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