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Fed holds rates but warns of tariff-driven inflation risks
The Federal Reserve left interest rates unchanged for the fourth consecutive meeting but cautioned that rising tariffs may soon push inflation higher, complicating the outlook for rate cuts in 2025.
Fed keeps rates steady as expected, but highlights growing tariff-related inflation risks
Dot plot shows split views on 2025; some policymakers expect no cuts at all
Powell signals costs from tariffs are coming, but timing and impact remain uncertain
Markets price in a 70% chance of a September cut; Powell says labor market doesn’t justify immediate easing
Fed stands pat but flags tariff-related inflation ahead
The Federal Reserve opted to keep its policy rate unchanged for the fourth straight meeting, maintaining the benchmark rate at 5.25%-5.50%. While this move was widely expected, the real focus was on Chair Jerome Powell’s comments and the updated dot plot, which revealed a sharp divide among policymakers over the future path of interest rates.
According to Powell, tariffs introduced by the Trump administration are likely to increase prices in the months ahead, although the extent and timing of their impact remain uncertain. "Ultimately the cost of the tariff has to be paid, and some of it will fall on the end consumer," Powell said. He stressed that the Fed needs to observe actual inflation responses before making premature judgments.
Growing split inside the Fed
The updated Summary of Economic Projections showed a notable divergence in views among FOMC members. While the median forecast still implies two cuts in 2025, seven officials now see no reductions next year, up from five in the previous dot plot. Powell attempted to downplay the disagreement, saying none of the participants holds their projected rate paths with strong conviction given the current uncertainty.
Markets, however, remain confident that a cut could come as early as September, with futures pricing in over a 70% probability. The Fed's revised projections now show core PCE inflation climbing to 3% in 2024, a meaningful upward revision from earlier expectations. Unemployment is also seen edging up to 4.5%, and growth forecasts for 2025 were slightly trimmed.
Tariffs complicate the policy path
Powell acknowledged that while inflation has come in softer than expected recently, the delayed impact of tariffs on prices will become clearer later this summer. For now, the Fed remains in a holding pattern, watching to see whether the inflationary pressures from new trade policies are transitory or more persistent.
The chair emphasized that the labor market does not currently demand a rate cut, as job creation remains stable and wage growth has moderated. Still, with rising trade-related costs and global uncertainty, the Fed faces a delicate balancing act in the months ahead.
The Federal Reserve's message was clear: while rates are on hold for now, inflation risks linked to tariffs are growing and could shape future decisions. The internal divide among policymakers highlights the difficulty of navigating an uncertain macroeconomic environment. Markets will look to Powell's testimony next week and fresh data on inflation and employment for further clues.
