Fed holds rates, signals two cuts later this year

June 18, 2025 (MLN): The Federal Reserve on Wednesday kept interest rates steady amid expectations of higher inflation and lower economic growth ahead, and still pointed to two reductions later this year.

With markets expecting no chance of a central bank move this week, the Federal Open Market Committee kept its key borrowing rate targeted in a range between 4.25%-4.5%, where it has been since December.

Economic projections from meeting participants pointed to further stagflationary pressures, with participants seeing the gross domestic product advancing at a 1.4% pace in 2025 and inflation hitting 3%.

The revised forecasts from the last update in March represented a decrease of 0.3% for GDP and an increase of the same amount for the personal consumption expenditures price index, as per the press release issued.

Core PCE, which eliminates food and energy prices, was projected at 3.1%, also 0.3% higher.

The unemployment outlook saw a small revision, up to 4.5%, or 0.1% higher than March and 0.3% higher than the current level.

The FOMC statement changed little from the May meeting. Broadly speaking, the economy grew at a “solid pace,” with “low” unemployment and “somewhat elevated” inflation, the committee said.

Moreover, the committee indicated less concern about the gyrations of the economy and the clouds over White House trade policy, as per CNBC.

“Uncertainty about the economic outlook has diminished but remains elevated. The Committee is attentive to the risks to both sides of its dual mandate,” the committee said.

During a news conference, Federal Reserve Chairman Jerome Powell suggested there is time to wait for more clarity.

“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 policies,” Powell said.

U.S. stocks held on to gains in the wake of the announcement.

While the Fed’s statement did not elaborate on why uncertainty has ebbed, President Donald Trump has eased some of his fiery trade rhetoric and the White House is in the midst of a 90-day negotiating period over tariffs.

Trump’s rhetoric toward the Fed, however, has not softened.

Earlier Wednesday, the president again slammed Powell and his colleagues for not easing.

Trump said the fed funds rate should be at least 2% lower and derided Powell as “stupid” for not pushing the committee to cut.

Fed officials have been reluctant to move, fearful that the tariffs Trump implemented this year could cause inflation in the coming months.

Price gauges so far have not indicated that the duties are having much of an impact.

A delay in feed-through of the tariffs along with softening consumer demand and a build-up of inventories ahead of the April 2 “liberation day” announcement have helped deflect their impac.

The conflict between Israel and Iran adds another wild card to the policy mix, with prospects of higher energy prices a potential additional factor in keeping the Fed from cutting.

The statement did not mention influence from the Middle East fighting.

A gradually softening economy could provide an incentive to cut later this year.

Recent labor market data shows layoffs creeping higher, long-term unemployment also rising, and consumers spending less. 

Retail sales tumbled nearly 1% in May, and recent data has reflected a cooling housing market, with starts hitting their lowest level in five years.

For Trump, though, the importance of lower rates stems from the high cost the government is paying to finance its $36 trillion debt.

Interest on the debt is on track to total $1.2tr this year and exceeds all other budget items except Social Security and Medicare.

The Fed last cut in December, and Treasury yields have held higher throughout the year, putting additional pressure on a budget deficit likely to approach $2tr, or more than 6% of GDP.