Fed Keeps Rates Steady, Eyes Two 2025 Cuts Amid Inflation

The Federal Reserve on Wednesday held its benchmark interest rate steady at 4.25% to 4.5%, citing persistent inflation and slower economic growth, while reaffirming expectations for two rate cuts in 2025.

The Federal Open Market Committee (FOMC) unanimously approved the decision, maintaining the rate level set in December. Updated projections indicate policymakers now anticipate two cuts this year but have scaled back expectations for further reductions in 2026 and 2027, forecasting four total cuts over the next two years, amounting to a one-percentage-point decrease.

Revised economic projections  show 2025 GDP growth lowered to 1.4% from 1.7% in March, while inflation is now expected to reach 3%, with core PCE inflation forecast at 3.1%. The unemployment rate is projected to climb to 4.5%.

The FOMC’s statement described the economy as growing at a “solid pace” with “low” unemployment but acknowledged inflation remains “somewhat elevated.” The committee noted that uncertainties around the economic outlook have diminished but emphasized continued vigilance on risks to employment and price stability.

Fed Chair Jerome Powell, speaking at a press conference, highlighted the central bank's cautious stance, stating, “We are well-positioned to wait and gather more clarity about the economy before making further adjustments.”

The decision comes amid renewed calls from President Donald Trump for a 2-point rate cut, coupled with criticism of Powell’s leadership. However, Fed officials have resisted such moves, citing inflation risks exacerbated by recent tariffs.

Powell acknowledged that tariffs could drive inflation higher but noted the effects have yet to be fully reflected in the data. “The consensus is that tariffs will push inflation upward because costs must eventually be passed along,” he said.

While geopolitical tensions, including the Israel-Iran conflict and potential energy price spikes, were not explicitly mentioned in the Fed’s statement, they remain part of the broader economic calculus.

Signs of economic cooling are evident, with retail sales falling nearly 1% in May, rising long-term unemployment, and housing starts hitting a five-year low. Analysts suggest continued weakening could accelerate the Fed's timeline for easing rates.

With US government debt approaching US$36 trillion and annual interest costs projected to reach US$1.2 trillion, pressures for rate cuts are unlikely to subside. The Fed’s last rate cut occurred in December 2024.