The U.S. Federal Reserve has once again decided to keep its benchmark interest rate unchanged at 4.5%, marking the fourth consecutive policy meeting with no change. This decision reflects the Fed’s cautious stance as it navigates a complex economic landscape marked by slowing growth and persistent inflation.
While Fed Chair Jerome Powell noted that economic uncertainty has somewhat diminished, he emphasized that it still remains elevated. The central bank has adjusted its macroeconomic projections accordingly. The Fed now expects the U.S. economy to grow by just 1.4% in 2025, a downgrade from earlier forecasts. At the same time, inflation expectations have been revised upward, with the central bank now projecting a 3% inflation rate for 2025.
Despite holding rates steady, the Fed’s updated dot-plot shows that policymakers still anticipate two rate cuts by the end of 2025, amounting to a total reduction of 50 basis points. Looking further ahead, the median projection for the federal funds rate is 3.6% in 2026 and 3.4% in 2027, indicating a gradual path of easing over the next few years.
Interest rate futures markets have reacted accordingly, with a growing consensus that the first rate cut may come as early as September. Investors have increased bets that the Fed will begin its rate-cutting cycle in the fall, particularly if inflation shows signs of sustained decline.
Meanwhile, political pressure on the Fed continues to mount. President Donald Trump, has publicly called for aggressive monetary easing, urging the central bank to slash rates by 100 basis points. However, the Fed has reiterated its independence and commitment to data-driven decisions.
The broader picture painted by the Fed's updated outlook suggests that the U.S. may be entering a period of stagflation—a scenario characterized by stagnant economic growth coupled with elevated inflation. This dual threat complicates the Fed’s task of balancing its twin mandates: supporting maximum employment and maintaining price stability.
For now, the Federal Reserve’s cautious pause continues, signaling that while rate cuts are likely on the horizon, policymakers remain vigilant in assessing incoming economic data before making their next move.
Despite the Federal Reserve's much-anticipated decision to keep interest rates unchanged, financial markets showed only a mild reaction. The Dow Jones Industrial Average was trading about 100 points higher following the announcement, while the Nasdaq Composite was up by approximately 0.30%. This subdued response suggests that the Fed's move was largely priced in by investors and did not come as a surprise. Markets appear to be in a wait-and-see mode, focusing on upcoming data and the timing of potential rate cuts later in the year.
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