The Federal Reserve elected on June 18, 2025, to maintain its federal funds rate at 4.25%–4.50%, continuing a cautious stance amid rising uncertainties linked to tariff hikes, volatile energy markets and slower economic growth. Chair Jerome Powell emphasized that existing projections for two rate cuts by year-end are still in place — but emphasized that any policy shift will depend heavily on emerging data and external pressures.
Powell highlighted the “meaningful” risk of inflation driven by the Trump administration’s pending tariffs on imports. He warned that even if recent inflation readings have been favorable, the tariffs are likely to raise prices because some combination of manufacturers, retailers and consumers will ultimately shoulder the costs. The Fed has decided to slow its projected rate cuts, projecting a 0.5 percentage point decrease this year, followed by only 0.25 point cuts in both 2026 and 2027, as it navigates this precarious balance.
Outlook: Growth Cooling, Unemployment Steady, Inflation Above Target
Accompanying the decision, the Fed updated its forecasts:
- GDP growth is expected to moderate to 1.4% in 2025 (down from 1.7%)
- Unemployment is projected to rise to 4.5% (up from prior estimates of around 4.4%)
- Inflation is forecast to end the year at 3%, well above the Fed’s 2% target.
Despite inflation remaining elevated, the labor market remains relatively solid; May’s unemployment was 4.2%, and wage pressures are muted — giving the Fed room to proceed carefully .
Market Reaction: Muted and Mixed
Markets responded cautiously: stock indexes were mostly flat, Treasury yields ticked upward slightly, and oil prices fluctuated amid mounting geopolitical tensions in the Middle East . Market pricing currently reflects expectations of a 25 basis point cut in September, with another cut possibly before year-end.
Internal Dynamics and External Pressures
The Fed remains internally divided, with seven of 19 policymakers now open to no rate cuts in 2025 — highlighting the uncertainty clouding economic forecasts. Powell reiterated that rate paths are not set in stone and called for a “data-dependent” approach.
Geopolitical factors are also complicating forecasts. Powell flagged the ongoing Israel‑Iran tension as a possible driver of energy price spikes — noting that while oil surprises may be transient, they still merit close monitoring .
Donald Trump, meanwhile, has ramped up criticism, labeling Powell “stupid” and pushing for a 1.0 percentage point rate cut — a demand Powell resisted, affirming the Fed’s independence and commitment to achieving its inflation mandate without political interference.
Why This Decision Matters
- Tariff Impacts – The Fed is increasingly pricing in potential inflation from trade policy, making any future easing conditional on clarifying tariff outcomes.
- Geopolitical Volatility – Energy price swings tied to Middle East tensions may force the Fed to reconsider its pace of cuts.
- Labor Market Resilience – Steady yet stable employment gives the Fed flexibility to wait for clearer signals before adjusting policy.
- Market Expectations – Investors are now eyeing September as the earliest possible cut, pending further inflation and wage data.
In sum, today’s decision underscores the Fed’s pivot to a “wait-and-see” approach, balancing the dual mandate of inflation control and employment support amid growing global uncertainty. Attention now turns to upcoming inflation reports, job data, and geopolitical developments to guide the timing and size of future rate moves. The next key juncture is the September FOMC meeting, where both the Fed’s evolving “dot plot” projections and Chair Powell’s remarks will be under close scrutiny.
