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Recent tariff increases have reignited inflationary pressures, complicating the economic landscape. Expectations for signing tariff agreements have not been met, and rising oil prices, fueled by missile exchanges between Iran and Israel, pose further inflation risks. The Federal Reserve (Fed) has announced its interest rate decision in this challenging environment.
Fed Interest Rate Decision
The consensus expectation for this meeting was to keep interest rates unchanged. This outcome was anticipated, especially after Trump’s statement earlier in the day, noting that the Fed would not lower rates again. Despite Trump’s remarks, the Fed’s independence remains intact, with a steadfast decision to maintain rates despite political pressures.
The earliest rate reduction is expected in September, with upcoming statements from Chair Powell being crucial. The impact of tariffs on inflation is a concern, compounded by escalating oil prices. A potential closure of the Strait of Hormuz could further inflate oil prices, since 20% of oil trade passes through this channel.
Key details of the Fed’s announcements are as follows:
The Fed has decided to keep interest rates stable. According to the Federal Open Market Committee (FOMC), the median forecast suggests interest rates will be 3.6% in 2026 and 3.4% in 2027, while a 50 basis point rate cut is expected for 2025.
Furthermore, the Fed noted that economic uncertainties have decreased but remain relatively high. Unemployment and inflationary risks have been removed from the text, reflecting the Fed’s stable economic outlook.
In terms of economic growth, the Fed projects a decline in GDP growth from 1.7% to 1.4% by 2025, with long-term growth expectations holding steady at 1.8%. The labor market remains robust, with minimal unemployment, while inflation persists at elevated levels.
U.S. interest rate futures now price in a 71% likelihood of a rate cut by September, up from 60% before the Fed’s announcement. Policymakers foresee PCE inflation at 3.0% and core inflation at 3.1% by 2025’s end, indicating moderate adjustments from previous projections.
