Fed holds rates steady and signals two cuts in 2025

The Federal Reserve left interest rates unchanged today, maintaining the federal funds target range at 4.25% to 4.50%, while signalling that two rate cuts are still expected in 2025. However, the Fed also dialled back its outlook for rate reductions in 2026 and 2027, citing persistent inflation pressures and economic uncertainties — many tied to trade and tariff developments under the Trump administration.

The central bank’s latest economic projections paint a cautious picture: slower GDP growth, rising unemployment, and inflation staying above the 2% target for longer than previously expected.

“Uncertainty about the economic outlook has diminished but remains elevated,” the Fed said in its policy statement. “The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.”

The Fed now forecasts US economic growth to slow to 1.4% in 2025, down from 1.7% projected in March. Unemployment is expected to rise to 4.5% by year-end, while inflation is projected to remain elevated at 3%, well above current levels. The central bank anticipates inflation will gradually decline to 2.1% by 2027, indicating a prolonged battle to bring price pressures under control.

Despite the slower pace of expected easing, the Fed’s dual mandate — maximum employment and stable prices — remains central to its policy stance. The Committee emphasized it would continue to assess incoming data and would be prepared to adjust its policy “as appropriate” if risks to the outlook emerge.

While the Fed held steady on its forecast of two 25-basis-point cuts in 2025, its longer-term outlook has shifted. It now sees just one cut in each of 2026 and 2027, signalling a more gradual return to a neutral rate environment. This shift comes amid concerns that inflation could be reignited by the Trump administration’s renewed tariff agenda.

“The Fed remains cautious about declaring victory over the recent prolonged surge in inflation,” particularly with new tariffs from the Trump administration threatening to reignite price pressures later this year,” said Garry White, Chief Investment Commentator at Charles Stanley.

“A cut in interest rates at this stage would have been unwise, given the persistent nature of inflation following the post-Covid spike.”