Federal Reserve leaves key rate unchanged, but sees two cuts this year

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 United States’ 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 on April 2. Most of those duties were then postponed on April 9. The Fed also signalled 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 3.0 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 2.0 per cent. Core inflation, which excludes the volatile food and energy categories, remains elevated at 2.5 per cent.

“Increases in tariffs this year are likely to push up prices and weigh on economic activity,” Powell said at a press conference after the Fed released its latest policy statement.

He added, however, that the extent of the impact depends on the size and duration of the tariffs. The “pause” 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 criticised 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,” the Fed chair said.

AP