Fed Holds Rates Steady Amid Tariff-Driven Fears; But Two Cuts in 2025 Still on Table

The US Federal Reserve kept the key interest rate unchanged as expected amid expectations of higher inflation and lower economic growth ahead. The Federal Open Market Committee kept the borrowing rate targeted between 4.25%-4.5%. The policymakers, however, still expect two rate cuts this year, even as they also estimate higher inflation due to President Donald Trump’s import duties.

Tariffs took center stage in the Federal Reserve’s decision and subsequent press briefing. Fed officials raised their inflation projections while dialing down growth expectations. Most of the policymakers anticipate that the effects of tariffs will begin to materialise later this summer.

Federal Reserve Chair Jerome Powell said that the Fed remains well positioned to respond to any need for interest-rate changes. While the labor market is not the source of inflationary pressure, it is the uncertainty of impact of tariffs on prices that has driven the decision of keeping the rates steady for now, he added.

Market expectations for a rate cut in September appear increasingly optimistic given current circumstances, Viram Shah, co-founder and CEO of Vested Finance, said in a note. The first cut is potentially delayed until the fourth quarter, reflecting economic prudence, he added.

“We expect a meaningful amount of inflation to arrive in the coming months,” The Wall Street Journal quoted Powell, as saying. "We have to take that into account." Trump, on the other hand, renewed his calls for a rate cut on Wednesday morning, and called Powell "a stupid person."

“You can see perhaps a very, very slow continued cooling” in the job market, “but nothing that’s troubling at this time,” The Associated Press quoted Powell. “We have to be forward looking.”

Although uncertainty about the economic outlook has diminished, it is still elevated and the committee is attentive to the risks to both sides of its dual mandate, the FOMC has said. Fed Chair Powell does not see a prolonged pressure on energy prices due to the ongoing conflict in West Asia.

The Indian equities market traded slightly lower in the pre-open trade on June 19. Nifty 50 index, was marginally lower from its previous close and only 3 points above the 24,800-mark in the pre-open trade.