Federal Reserve Leaves Its Key Rate Unchanged But Sees Two Cuts This Year

Al Arabiya

5 hours ago

Federal 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 signaled it would cut rates just once in 2026, down from two cuts projected in March. Fed officials see inflation, according to its preferred measure, rising to 3 percent by the end of this year from 2.1 percent in April. It also projects the unemployment rate will rise to 4.5 percent from 4.2 percent currently. Growth is expected to slow to just 1.4 percent this year, down from 2.5 percent 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 percent in April, essentially back at the central bank's target of 2 percent. Core inflation, which excludes the volatile food and energy categories, remains elevated at 2.5 percent.
At a press conference after the Fed released its latest policy statement, Powell said, 'Increases in tariffs this year are likely to push up prices and weigh on economic activity.' He added, however, that the extent of the impact depends on the size and duration of the tariffs. The pause Trump put in place on many of the tariffs is set to end on July 9, pending any deals the administration strikes with its trading partners. 'We don't yet know with any confidence where (the tariffs) will settle out,' he said.
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.
Powell continued to stress that the current strength in the economy allows the Fed to be 'patient' as he spoke with reporters. 'We'll make smarter and better decisions if we wait just a couple of months or however long it takes to get a sense of what is really going to pass through to inflation.'
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 $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 UK. On Tuesday, the Bank of Japan kept its key short-term rate unchanged at 0.5 percent 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 US tariffs are weakening their economies. So far, the US 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 percent when it meets Thursday.