Fed holds key rate steady

WASHINGTON – The Federal Reserve on Wednesday kept interest rates steady amid expectations of higher inflation and lower economic growth ahead, and still pointed to two reductions later this year.

With markets expecting no chance of a central bank move this week, the Federal Open Market Committee kept its key borrowing rate targeted in a range between 4.25%-4.5%, where it has been since December.

Along with the rate decision, the committee indicated, through its closely watched “dot plot,” that two cuts by the end of 2025 are still on the table. However, it lopped off one reduction for both 2026 and 2027, putting the expected future rate cuts at four, or a full percentage point.

The plot indicated continued uncertainty from Fed officials about the future of rates. Each dot represents one official’s expectations for rates. There was a wide dispersion on the matrix, with an outlook pointing to a fed funds rate around 3.4% in 2027.

Seven of the 19 participants indicated they wanted no cuts this year, up from four in March. However, the committee approved the policy statement unanimously.

Economic projections from meeting participants pointed to further stagflationary pressures, with participants seeing the gross domestic product advancing at a 1.4% pace in 2025 and inflation hitting 3%.

During a news conference, Federal Reserve Chairman Jerome Powell suggested there is time to wait for more clarity.

“For the time being, we are well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policies,” Powell said.

U.S. stocks were wavering near flatline in the wake of the announcement.

While the Fed’s statement did not elaborate on why uncertainty has ebbed, President Donald Trump has eased some of his fiery trade rhetoric and the White House is in the midst of a 90-day negotiating period over tariffs.

Trump’s rhetoric toward the Fed, however, has not softened.

Earlier Wednesday, the president again slammed Powell and his colleagues for not easing. Trump said the fed funds rate should be at least 2 percentage points lower and derided Powell as “stupid” for not pushing the committee to cut.

Fed officials have been reluctant to move, fearful that tariffs Trump implemented this year could cause inflation in the coming months. Price gauges so far have not indicated that the duties are having much of an impact. A delay in feed-through of the tariffs along with softening consumer demand and a buildup of inventories ahead of the April 2 “liberation day” announcement have helped deflect their impact.

The conflict between Israel and Iran adds another wild card to the policy mix, with prospects of higher energy prices a potential additional factor in keeping the Fed from cutting. The statement did not mention influence from the Middle East fighting.

A gradually softening economy could provide incentive to cut later this year.

Recent labor market data shows layoffs creeping higher, long-term unemployment also rising and consumers spending less. Retail sales tumbled nearly 1% in May and recent data has reflected a cooling housing market, with starts hitting their lowest level in five years.

“Effectively they are sitting on their hands, waiting to see if tariffs increase inflation or the jobs market starts to falter, and whichever part of their dual mandate is impacted first will likely guide whichever direction they take, although the bias is still toward cutting rates (or at least keeping rates unchanged; not raising rates),” said Chris Zaccarelli, chief investment officer at Northlight Asset Management.

Zaccarelli wasn’t surprised that rates held steady. However, he said the market was surprised by the comment that uncertainty had “diminished.”

For Trump, though, the importance of lower rates stems from the…