Jerome Powell, chairman of the U.S. Federal Reserve, during a news conference following a Federal Open Market Committee (FOMC) meeting in Washington, D.C., today. Photographer: Kent Nishimura/Bloomberg.
Federal Reserve officials have left interest rates unchanged, and they continue to pencil in two rate cuts in 2025, saying uncertainty over the economic outlook is still high but has diminished. The Federal Open Market Committee (FOMC) voted unanimously to hold the benchmark federal funds rate in a range of 4.25 percent to 4.5 percent, as they have at each of their meetings this year. Officials also downgraded their estimates for economic growth this year while lifting their forecasts for unemployment and inflation.
Although the median expectation for two rate cuts in 2025 didn’t change, a number of officials lowered their projections. Seven officials now foresee no rate cuts this year, compared with four in March. Two others pointed to one cut this year.
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“Uncertainty about the economic outlook has diminished but remains elevated,” officials said in their post-meeting statement.
Traders are now pricing in a 74 percent probability that the Fed will lower rates by September, compared with 66 percent prior to the meeting. Policymakers dropped a line from their previous statement that said risks to both unemployment and inflation had risen.
In the run-up to this month’s meeting, many officials signaled their preference to hold rates steady for some time as they wait for clarity on how President Donald Trump’s economic policies will affect the trajectory of inflation and the broader economy. Fed officials and economists broadly expect the administration’s expanded use of tariffs to weigh on economic activity and put upward pressure on inflation. The rate outlook from officials is in line with investors’ expectations for cuts this year prior to the announcement.
Policymakers also issued updated quarterly rate projections and economic forecasts, the first since Trump unveiled sweeping tariffs on U.S. trading partners—many of which he has since pared back or delayed. Officials raised their median estimate for inflation at the end of 2025 to from 2.7 percent to 3 percent. They also marked down their forecast for economic growth in 2025 from 1.7 percent to 1.4 percent. And they are now forecasting an unemployment rate of 4.5 percent by the end of the year, up slightly from their previous estimate.
These projections reflect the thorny situation facing Fed policymakers. Trump has imposed new tariffs on dozens of countries since taking office but has repeatedly wavered on the specifics of the policies. The final level of import duties remains subject to change as the administration continues to negotiate trade deals, including a framework agreed upon with China.
But officials have warned the central bank may confront challenging tradeoffs if tariffs simultaneously drive up inflation and dent economic growth. Growing inflationary pressures typically suggest that Fed policy should restrain the economy with elevated rates, while weakening growth calls for stimulus through lower rates. Trump this year has repeatedly pushed for the Fed to cut rates, arguing the central bank under Powell has often been late to adjust policy.
No Sign Yet
Neither employment nor inflation data has yet shown a substantial impact from tariffs. A measure of underlying consumer inflation rose in May by less than forecast, spurring Trump to renew his call for lower rates. Meanwhile, U.S. employers added jobs at a solid pace last month, and the unemployment rate held at 4.2 percent. Fed officials have pointed to the labor market’s overall stability as an additional reason to take a patient approach toward adjusting interest rates.
Policymakers are also eager to guard against the possibility that tariff-driven price hikes lead to more persistent inflation. Survey data from the University of Michigan has shown a rise in Americans’ expectations for future inflation. Officials have acknowledged that development, but have broadly argued that longer-run expectations remain in check.
Officials must also try to assess Trump 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 U.S. deficit over time and expand economic growth modestly, according to the nonpartisan Congressional Budget Office. The administration is also stepping up immigration enforcement, thereby limiting the supply of labor to some sectors, and pursuing a de-regulatory agenda.
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