The Fed holds interest rates steady — and still sees two cuts later this year

The Federal Reserve held interest rates steady Wednesday, defying pressure to cut them and sticking to a wait-and-see strategy as inflation shows signs of cooling — but remains above target.

"Although swings in net exports have affected the data, recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate remains low, and labor market conditions remain solid. Inflation remains somewhat elevated," the Fed statement read.

The decision and surrounding reasoning, widely expected by markets, leaves the federal funds target rate at its current range of 4.25% to 4.50%. Futures traders going into the meeting priced in less than a 1% chance of a cut so are unlikely to be surprised by the announcement.

Looking ahead, the Fed continues to expect two rate cuts this year.

Details from the Statement of Economic Projections and Powell’s comments

The Fed’s latest “dot plot” shows a clear shift toward caution, with consensus narrowing and hawkish expectations widening. Just 10 of the 19 officials now foresee at least two interest rate cuts in 2025, down from a greater majority in March. Seven expect no cuts at all, up from just four. At the same time, policymakers revised their inflation outlook higher, projecting that core inflation will remain elevated through year-end.

In his remarks and answers to media questions, Powell noted “trade policy concerns” among officials, said he expects GDP to slow, and spoke of tariffs’ effects as only just beginning to be seen, in part because no one quite knows where the effective tariff level will land. He reiterated that tariffs will push up prices, though “that process is very hard to predict,” and “we’d like to get some more data” before attempting to mitigate price pressures.

Asked directly about insults lobbed by the White House, Powell said that ensuring the health of the American economy is "all that matters to us."

Extraordinary political pressure

If the Fed’s decision isn’t surprising, the political backdrop remains extraordinary.

President Donald Trump has repeatedly called for immediate rate cuts to support the economy amid trade tensions — and has personally targeted Fed Chair Jerome Powell, whom he had appointed in 2017, calling him a “FOOL” on social media, with further comments on Wednesday.

But Powell and his colleagues have held firm, citing inflation expectations and the still-fragile global outlook. While headline inflation has moderated, it remains above the Fed’s 2% target. And Trump’s various rounds of tariffs since assuming office early this year— announced piecemeal and often unpredictably — has introduced new volatility into supply chains and price forecasts.

Fed prepared to wait out pressure

“We don’t feel like we need to be in a hurry,” Powell said in May. “We feel like it’s appropriate to be patient.”

That patience, of course, comes with risks. U.S. GDP contracted in Q1 and may do so again in Q2. Job growth is somewhat sluggish. And while the market has bounced back from its April “Liberation Day” lows, consumer sentiment remains uneasy. Meanwhile, Fed officials appear more concerned about reigniting inflation than about being seen as unresponsive.

The central bank’s credibility — and the value of its independence — may be its most powerful tool right now.