The Federal Reserve said Wednesday it’s keeping its benchmark interest rate unchanged, citing elevated uncertainty over the nation’s economic outlook.
The decision to hold rates steady marks a continuation of the Fed’s “wait-and-see” strategy this year, as it monitors the impact of the Trump administration’s tariffs on consumer prices. But Wednesday’s policy statement also underscored that the growth remains steady despite concerns about slowing economic activity.
“Although swings in net exports continue to affect the data, recent indicators suggest that growth of economic activity moderated in the first half of the year,” the Federal Open Market Committee, the 12-person central bank’s rate-setting panel, said in its statement. “The unemployment rate remains low, and labor market conditions remain solid. Inflation remains somewhat elevated.”
Two voting FOMC members, Fed Governors Michelle Bowman and Christopher Waller, voted in favor of lowering the central bank’s short-term rate — a rare show of dissent at the Fed, where monetary policy is generally set by consensus. It is the first time since 1993 that two member of the Fed’s Board of Governors have voted against the chair, according to Capital Economics.
Federal Reserve Chair Jerome Powell has faced pressure in recent months from President Trump to lower rates, with the president arguing that inflation remains relatively tame.
In a press conference on Wednesday, Powell said most FOMC members voted in favor of maintaining the current rate because inflation remains above the Fed’s 2% annual target, while also describing the economy as remaining in good shape.
“The economy is not performing as though restrictive policy were holding it back inappropriately,” he said.
Powell added, “The economy is in good shape, but it’s an unusual situation in that you have risks to both sides of the mandate,” referring to the Fed’s dual goal of keeping both prices and unemployment low.
By the numbers
The central bank on Wednesday said it would maintain the federal funds rate at its current range of 4.25% to 4.5%. The last time the central bank cut interest rates was in December 2024, when it trimmed rates by 0.25 percentage points.
Wall Street had anticipated the Fed’s decision, with economists pegging the probability the central bank would hold rates steady at 96%, according to financial data firm FactSet.
Why is the Fed holding rates steady?
The Fed’s Powell has signaled the Fed remains cautious about lowering rates given the potential impact of the Trump administration’s tariffs, which he has said could dent economic growth and reignite inflation.
Nancy Vanden Houten, lead U.S. economist at Oxford Economics, thinks the dissents by Bowman and Waller represent a minority opinion on the FOMC, with most of the rate-setting panel’s voting members preferring to hold rates steady amid amid concern about inflation.
Inflation remains above the Fed’s 2% target, with the Consumer Price Index rising in June to an annualized rate of 2.7%. At the same time, the economy remains solid. The economy grew at a stronger-than-expected 3% rate between April and June, according to data released Wednesday, with economists saying the rebound in growth from earlier this year supports the Fed’s argument for keeping rates steady.
“This [GDP] report is unlikely to shift the Federal Reserve’s stance,” said Gina Bolvin, president of Bolvin Wealth Management Group, in an email prior to the Fed’s decision. The central bank will “wait for more consistent signals before considering rate cuts.”
When could the Fed cut rates?
Economists currently predict a 63% likelihood the Fed will cut rates at its two-day meeting on Sept. 16-17, according to FactSet. The FOMC, the central bank’s rate-setting panel, doesn’t meet in August, making the September meeting the next chance for a rate cut.
Although the economy has proved resilient despite concerns about the impact of U.S. tariffs, some economists expect growth to lag and inflation to accelerate over the next few months. Following the latest Fed statement, Pantheon Macroeconomics chief U.S. economist Samuel Tombs forecast that the Fed will ease its benchmark rate by a total of 0.75 percentage points by year-end, starting in September.
Asked whether the Fed could cut rates at the September meeting, Powell demurred, saying that the decision will be based on economic data that is released between now and the central bank’s next meeting on Sept. 16-17. In the lead-up to that decision, the Fed will assess two monthly job reports from the Department of Labor and two additional months’ of CPI data.
Mr. Trump on Wednesday announced a 25% tariff rate on imports from India ahead of his administration’s Aug. 1 deadline to strike trade deals with dozens of other countries. American importers such as Walmart are on the hook for paying the tariffs, although many companies stocked up on goods earlier this year to try to avoid hiking prices for inflation-weary customers.
“We know from surveys that companies have every intention of putting [the tariff costs] through to consumers,” Powell said. “A reasonable base case is these are one-time price effects.”
He added, “We will make sure this doesn’t move from being a one-time price increase to serious inflation.”
Powell’s remarks emphasizing the solid U.S. economy, as well as the risks from tariffs, signaled to some economists that a September rate cut might not be in the cards.
” For [a September rate cut] to happen, the rest of the FOMC will need to become either less concerned about the inflation outlook or more concerned about the economic and labor market outlook,” said Capital Economics deputy chief North American economist Stephen Brown in a report.
