Fed Keeps Rates Steady but Pencils in Two Cuts by End of 2025

• The U.S. central bank held interest rates steady on Wednesday and policymakers signaled borrowing costs are still likely to fall in 2025, but Federal Reserve Chair Jerome Powell cautioned against putting too much weight on that view, and said he expects "meaningful" inflation ahead as consumers pay more for goods due to the Trump administration's planned import tariffs.
• Powell noted that if it weren’t for tariffs, rate cuts could be justified, as recent inflation figures have been relatively low. But a cost shock is coming, he insisted, with producers, manufacturers, and retailers still involved in a complicated struggle over who will pay the levies imposed so far, and President Donald Trump still contemplating an aggressive set of import duties that could go into effect early next month.
• In new economic projections released alongside the Fed's statement, policymakers sketched a modestly stagflationary picture of the economy, with growth in 2025 slowing to 1.4%, unemployment rising to 4.5%, and inflation ending the year 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 and December, 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 their 2% target.
• There was a split among the 19 policymakers, with seven of them feeling that no rate cuts would be needed. That diversity of views reflects that while uncertainty over Trump's tariff policy is down from its peak in April, it's still "a very foggy time," Powell said, adding that policymakers may have divergent assessments of the risk that inflation could stay persistently higher, or that the labour market could weaken.

(Source: Reuters)