Fed Leaves Rates Unchanged, Sees Two Cuts in 2025 But Less Easing in Later Years

• The Federal Reserve (Fed) held interest rates steady on Wednesday, June 18, 2025, and policymakers signalled borrowing costs are still likely to fall this year but slowed the overall pace of expected future rate cuts in the face of estimated higher inflation flowing from the Trump administration's tariff plans.
• In new economic projections, policymakers sketched a modestly stagflationary picture of the U.S. economy, with economic growth slowing to 1.4% this year, unemployment rising to 4.5% by the end of this year, and inflation finishing 2025 at 3%, well above the current level.
• While policymakers still anticipate cutting rates by half a percentage point this year, as they projected in March 2025 and December 2024, they slightly slowed the pace from there to a single quarter-percentage-point cut in each of 2026 and 2027 in a protracted fight to return inflation to the central bank's 2% target.
• Under the new projections, inflation remains elevated at 2.4% through 2026 before falling to 2.1% in 2027 amid largely stable unemployment. The 1.4% growth in output this year compares to the 1.7% rate seen in the last round of projections in March, and the 4.5% unemployment rate expected at the end of the year is up from the 4.4% projected in March. The rate in May was 4.2%
• So far, however, "the unemployment rate remains low, and labour market conditions remain solid," the Fed said in its policy statement, which was approved unanimously. It did not mention the sudden outbreak of hostilities between Israel and Iran and the risk that conflict posed to global oil or other markets.
• The rate projections from Fed officials for this year, at least, are in line with recent market expectations for a quarter-percentage-point rate reduction as soon as the September meeting. The central bank continues to ignore Trump's call for immediate rate cuts, a move Fed officials feel would be counter to their effort to ensure inflation returns to their 2% target until key tariff changes are finalised and their effects are better understood.

(Source: Reuters)