Federal Reserve holds US interest rates steady but slashes growth forecast

The National

6 hours ago

The US Federal Reserve kept interest rates unchanged on Wednesday, extending its monetary policy stance amid tariff uncertainty and geopolitical headwinds driving a surge in energy prices.
This week's decision marked the fourth consecutive time the Fed has held rates steady after lowering them by 100 basis points to roughly 4.33 per cent last year.
The UAE's central bank also held rates steady following the Fed's announcement.
While the Fed's rate decision was seen as set heading into this week's meeting, Wednesday marked the first time that officials had to estimate how tariffs would affect inflation, unemployment, economic growth and their rate path since President Donald Trump's 'Liberation Day' announcement on April 2.
The effects of tariffs will depend, among other things, on their ultimate level," Fed Chair Jerome Powell said during a news conference.
While tariffs are not expected to be as high as previously announced, he said "tariffs this year are likely to push up prices and weigh on economic activity".
Investors were expected to closely watch the so-called dot plot part of the central bank's quarterly projections, which shows where each Fed official anticipates interest rates will be in the coming years.
The Fed said it expects to cut interest rates twice this year, unchanged from it March projection. However it anticipated a slower rate-cut path in 2026 and 2027.
Traders currently project the Fed will cut rates twice this year beginning in September, in line with central bank estimates.
Updated economic projections reinforce recent concerns of a low-growth, high-inflation outlook.
The Fed currently estimates inflation to rise to 3.1 per cent by end of this year compared to its previous estimate of 2.7 per cent. The Fed also lowered its projected economic growth rate this year from 1.7 per cent to 1.4 per cent.
It also estimated the unemployment rate to increase to 4.5 per cent this year compared to 4.4 per cent previously.
Recent data has produced mixed signals about the US economy. Inflation has moderated but remains above the Fed's 2 per cent target. The unemployment rate remains stable at 4.2 per cent, but slowing employment growth and a four-week rise in jobless claims point to a cooling labour market.
The economy also slowed last quarter, with economists attributing the 0.2 per cent contraction to a rush of imports ahead of tariffs coming into effect.
Meanwhile, retail sales dragged last month due to a decline in consumer spending, after shoppers rushed to purchase goods before tariffs were expected to take effect.
Escalating tension between Israel and Iran has only added another layer of uncertainty for the Fed to deal with. Global oil prices are rising in volatile trade and a potential US involvement in Israel's strikes on Iran will further rock oil markets, a scenario the US President wants to avoid to keep consumer prices stable in the domestic market.
The Federal Reserve has signalled it wants greater clarity on tariffs before it is prepared to move on interest rates again.
Economists generally argue that Mr Trump's tariffs could lead to slower growth and higher inflation, and Fed officials have pointed to rising risks to their price stability and maximum employment mandates.
Trump resumes attacks on Powell
Hours before the rate decision, Mr Trump once again lashed out at Mr Powell over the Fed's cautious posture.
Interest rates should be a full two points lower than their current level, the President said.
Mr Trump has recently said he will not fire Mr Powell before his term as Fed chair expires next year after previously considering the option. On Wednesday Mr Trump said he will wait for Mr Powell's term to end and then 'get the rates way down'.
'Powell's too late,' said Mr Trump, who mused about appointing himself to the Federal Reserve.