People and businesses in the US have faced a whirlwind of policy change in recent months. However, one thing has remained constant: the US central bank's set borrowing costs. Even though officials' expectations for the economy were getting worse, the Federal Reserve continued with that strategy on Wednesday and kept the key interest rate the same. The decision, the fourth in a row without action, maintained the influential lending rate of the bank at around 4.3 percent, the same level it has been since December. That came despite forecasts from policymakers suggesting they expect slower growth, higher unemployment and faster inflation than they did just a few months ago.
The Federal Reserve typically raises borrowing costs when prices begin to rise too quickly and lowers borrowing costs when it believes the economy is struggling. While pushing major changes to economic policy, such as raising tariffs on goods from around the world, President Donald Trump has repeatedly urged the Federal Reserve to cut interest rates. Fed officials, who are empowered to set interest rates independent of the White House, have said they are worried that a one-time jump in prices due to those new levies could morph into a more persistent problem.
In May, inflation—the rate at which prices rise—remained above the Fed's target of 2%. As businesses begin to pass on the cost of the import taxes to their customers, Federal Reserve Chairman Jerome Powell stated that the bank was prepared for prices to rise more quickly in the coming months. "That process is very hard to predict," he said, noting that it would depend on how big the tariffs are and their duration.
"For this reason, we believe that staying where we are is the right thing to do." He said the bank could afford to wait, noting that the economy overall remained "solid" and the unemployment rate remains low at 4.2%.
But projections released by the Fed showed that policymakers, on average, are expecting growth to slow to 1.4% this year, down from 2.5% last year and the 1.7% they were forecasting in March.
The forecasts call for inflation of roughly 3%, up from the 2.7% predicted in March and a rise in the unemployment rate to 4.5%.
The outlook for interest rate cuts in 2025 did not change significantly, with a majority of members still expecting rates to drop just below 4% by the end of the year.
However, the projections anticipate slightly higher rates than previously anticipated in 2026 and 2027. In remarks on Wednesday ahead of the Fed's decision, Trump repeated his criticism of Powell, calling him "stupid" and "too late" to act, while speculating about the end of his term.
The European Central Bank has cut interest rates eight times since last June. The Bank of England cut borrowing costs last month but is expected to hold rates steady this week.
However, Wealth Club's investment manager Isaac Stell suggested that Trump may have "talked himself into a bit of a bind" due to the Fed's continued commitment to its wait-and-see strategy. "Central bankers tend to jealously guard their independence, which means that unless there's a really compelling reason to cut they might just stay sat on the fence," he said.
Fed interest rate decisions determine what it charges banks for short-term loans.
That rate, in turn, has a significant impact on the costs of borrowing throughout the economy, determining the prices that regular banks charge individuals and businesses for mortgages and other types of loans. The Fed's benchmark interest rate, which stands at 4.3 percent, is still significantly higher than it was between 2008 and 2022, when the bank began raising rates in response to rising prices. However, it is about a percentage point lower than it was last year.
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