U.S. Federal Reserve leaves its key rate unchanged but sees two cuts this year

CTV News

4 hours ago

WASHINGTON — U.S. Reserve officials expect inflation to worsen in the coming months but they still foresee two interest rate cuts by the end of this year, the same as they projected in March.
The Fed kept its key rate unchanged for the fourth straight meeting Wednesday, and said the economy is expanding at 'a solid pace.' Changes to the Fed's rate typically — though not always — influence borrowing costs for mortgages, auto loans, credit cards, and business loans.
The central bank also released its latest quarterly projections for the economy and interest rates. It expects noticeably weaker growth, higher inflation, and slightly higher unemployment by the end of this year than it had forecast in March, before President Donald Trump announced sweeping tariffs April 2. Most of those duties were then postponed April 9. The Fed also signalled it would cut rates just once in 2026, down from two cuts projected in March.
U.S. Fed officials see inflation, according to its preferred measure, rising to 3 per cent by the end of this year, from 2.1 per cent in April. It also projects the unemployment rate will rise to 4.5 per cent, from 4.2 per cent currently. Growth is expected to slow to just 1.4 per cent this year, down from 2.5 per cent last year.
Despite the gloomier outlook, Fed chair Jerome Powell and other officials have underscored that they are holding off from any changes to their key rate because of the uncertainty surrounding the impact of the tariffs and economic outlook. Some of the Fed's policymakers have expressed particular concern that the duties could boost prices, creating another surge of inflation just a couple of years after the worst inflation spike in four decades. Many economists say that without the higher import taxes, the Fed would likely be cutting its rate further.
Yet so far, inflation has cooled this year to just 2.1 per cent in April, essentially back at the central bank's target of 2 per cent. Core inflation, which excludes the volatile food and energy categories, remains elevated at 2.5 per cent.
Trump has pointed to the mild inflation figures to argue that the Fed should lower borrowing costs and has repeatedly criticized Powell for not doing so. On Wednesday he called Powell 'stupid' and accused him of being 'political' for not cutting rates.
Trump has previously argued that a rate cut would boost the economy. Now his focus has shifted to the federal government's borrowing costs, which have shot higher since the pandemic, with interest payments running at an annual rate of more than US$1 trillion.
Pushing the Fed to cut rates simply to save the government on its interest payments typically raises alarms among economists, because it would threaten the Fed's congressional mandate to focus on stable prices and maximum employment.
One of Trump's complaints is that the Fed isn't cutting rates even as other central banks around the world have reduced their borrowing costs, including in Europe, Canada, and the U.K. On Tuesday, the Bank of Japan kept its key short-term rate unchanged at 0.5 per cent, after actually raising it recently.
But the European Central Bank, Bank of Canada, and Bank of England have reduced their rates this year in part because U.S. tariffs are weakening their economies. So far the U.S. economy is mostly solid, with the unemployment rate low.
The Bank of England has cut its rate twice this year but is expected to keep it unchanged at 4.25 per cent when it meets Thursday.
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Christopher Rugaber, The Associated Press