WASHINGTON – On Wednesday, the Federal Reserve opted to maintain its current interest rates amidst anticipated inflation increases and a deceleration in economic growth, while still indicating the possibility of two rate cuts by the end of the year.
As financial markets predicted no change in policy, the Federal Open Market Committee (FOMC) kept its benchmark borrowing rate steady at a range of 4.25% to 4.5%, which has been unchanged since December.
The committee’s decision aligns with its well-scrutinized “dot plot,” suggesting that although it anticipates two rate reductions by late 2025, it has cut one projected rate cut for both 2026 and 2027, revising the total expected future cuts to four, or a full percentage point.
This latest projection reflects the ongoing uncertainty among Fed officials regarding future rate actions, illustrated by a significant variation in individual forecasts, which indicates a fed funds rate around 3.4% by 2027.
Seven of the 19 committee members expressed a preference for not implementing any cuts this year, an increase from four in March. Despite these differing opinions, the policy statement received unanimous approval.
Economic forecasts from the FOMC members showed escalating stagflationary pressures, predicting a GDP growth rate of 1.4% in 2025 and inflation rates climbing to 3%.
GDP forecast comes down
The updated projections demonstrated a downward revision of 0.3 percentage points for GDP, alongside a corresponding increase for the personal consumption expenditures price index. Core PCE, which excludes food and energy, was anticipated at 3.1%, also up by 0.3 percentage points. The forecast for unemployment was also slightly revised upward to 4.5%, which is 0.1 percentage points higher than in March and 0.3 percentage points above the current rate.
Overall, the FOMC statement remained largely consistent with its previous May release, characterizing the economy as growing at a “solid pace,” with “low” unemployment levels and “somewhat elevated” inflation.
Furthermore, the committee displayed decreased concern regarding the volatility of the economy and uncertainties surrounding White House trade policies.
“While uncertainty about the economic outlook has decreased, it still remains elevated. The Committee is alert to the risks related to both aspects of its dual mandate,” the statement highlighted.
During a press briefing, Federal Reserve Chairman Jerome Powell emphasized the readiness to await further clarity before making policy adjustments. He stated, “At this moment, we are positioned well to wait and observe the future trajectory of the economy before considering any changes to our policies.”
Following the announcement, U.S. stock markets held onto their gains.
Trump pushes for rate cuts
Although the Fed’s statement did not specify why uncertainty has waned, President Donald Trump has moderated some of his aggressive trade language, coinciding with a 90-day negotiation period over tariffs.
Nonetheless, Trump continued to express dissatisfaction with the Federal Reserve’s decisions, criticizing Powell and his team for not lowering rates. On Wednesday, he declared that the fed funds rate should be at least two percentage points lower and labeled Powell as “stupid” for not advocating for reductions.
Fed officials remain hesitant to change rates, fearing that tariffs implemented by Trump could trigger inflation in the near future. So far, economic indicators have not shown significant impacts due to the tariffs, attributed to a delay in their effects, alongside diminishing consumer demand and inventory buildup before the April 2 “liberation day” announcement.
The ongoing conflict between Israel and Iran presents an additional layer of complexity, as rising energy prices could deter the Fed from moving forward with rate cuts. The recent statement did not mention any influence from the fighting in the Middle East.
A gradually weakening economy could motivate policymakers to consider cuts later in the year.
Recent labor market data indicated an uptick in layoffs, an increase in long-term unemployment, and a decline in consumer spending. Retail sales fell nearly 1% in May, while recent data also suggested a cooling housing market, with construction starts reaching their lowest levels in five years.
For Trump, the importance of lowering rates is largely tied to the significant costs associated with financing the government’s $36 trillion debt. Interest on the national debt is projected to total $1.2 trillion this year, surpassing all budget expenditures except Social Security and Medicare. The Fed last implemented a rate cut in December, while Treasury yields have remained elevated throughout the year, exacerbating a budget deficit that is expected to approach $2 trillion, or more than 6% of GDP.
Correction: Meeting participants forecast that gross domestic product will grow at a 1.4% pace in 2025. An earlier version of this article misstated the year.
