On Wednesday, the Federal Reserve announced that it will not change its benchmark interest rate. This decision comes as economic uncertainty remains a significant concern.
The Fed’s choice to keep rates stable continues the “wait-and-see” approach for this year, especially as it evaluates how the tariffs imposed by the Trump administration are impacting consumer prices. Nevertheless, the statement released on Wednesday highlighted the overall steady growth of the economy, even in light of slight worries about a slowdown.
In their statement, the Federal Open Market Committee — the Fed’s decision-making body — noted, “Despite fluctuations in net exports affecting the data, recent signs show a slight moderation in economic growth during the first half of the year.” They mentioned that unemployment is still low, and the labor market appears stable. However, inflation remains relatively high.
Notably, two of the voting members on the FOMC, Governors Michelle Bowman and Christopher Waller, favored lowering short-term interest rates, which is uncommon as policy usually leans toward consensus. According to Capital Economics, this marks the first time since 1993 two governors have voted against the chair.
Jerome Powell, the Chair of the Federal Reserve, has recently seen pressure from President Trump regarding lowering interest rates, especially with the President arguing that inflation levels are under control.
During a press conference that day, Powell expressed that most members supported maintaining the current rate due to inflation being above the Fed’s target of 2% annually. He maintained that the economy is doing well.
He stated, “The economy doesn’t seem to be hampered by excessive restrictive policies at this time.”
Powell also acknowledged that it’s a peculiar situation as the Fed faces risks pertaining to both reducing inflation and managing unemployment.
Key Statistics
The central bank’s decision on Wednesday confirmed that it would uphold the federal funds rate between 4.25% to 4.5%. The last instance of a rate cut by the Fed was back in December 2024, which saw a reduction of 0.25 percentage points.
Wall Street foresaw this decision, with economists suggesting a 96% chance that the Fed would maintain the rates, according to FactSet.
Reasons Behind the Steady Rates
Chairman Powell has shown that the Fed is quite cautious about cutting rates due to potential ramifications from Trump’s tariffs, which he believes could negatively affect growth and lead to renewed inflation.
Nancy Vanden Houten, a leading U.S. economist at Oxford Economics, claimed that the differing opinions from Bowman and Waller do not represent the majority view on the FOMC, as other voting members lean toward keeping rates stable amid inflation concerns.
Inflation still exceeds the Fed’s 2% target, with the Consumer Price Index increasing to a 2.7% yearly rate in June. The economy, on the other hand, appears strong, achieving a surprising 3% growth rate from April to June, which, according to experts, justifies the Fed’s reason for holding steady.
Gina Bolvin, President of Bolvin Wealth Management Group, mentioned in an email prior to the Fed meeting that the recent GDP report probably wouldn’t sway the Fed’s perspective. They are likely to wait for more defined signals before considering any rate cuts.
Potential Rate Cuts in the Future
Currently, economists estimate a 63% possibility that the Fed would lower rates during its meetings on September 16-17. As the FOMC will not convene in August, the September meeting will provide an opportunity for rate adjustments.
Though the economy continues to perform well amidst tariff concerns, some forecasters anticipate that growth could slow down while inflation speeds up in the upcoming months. Following the statement from the Fed, Pantheon Macroeconomics’ chief U.S. economist, Samuel Tombs, predicted that the central bank might reduce its benchmark rate by a cumulative 0.75 percentage points before the end of the year, starting possibly in September.
When questioned about a potential rate cut in September, Powell avoided a direct answer, emphasizing that any decisions would rely heavily on the upcoming economic data releases prior to the FOMC’s next gathering on September 16-17. They would be watching two monthly job reports and additional months of CPI data keenly.
On the same day, President Trump declared a 25% tariff on imports from India ahead of the August 1 deadline for trade agreements with several countries. American retailers, including Walmart, would be responsible for these tariffs; however, many planned ahead by stocking up to keep prices low for consumers who might be feeling the pinch of inflation.
Powell mentioned that surveys indicate companies are inclined to adjust prices in reaction to the tariffs: “We understand from various captures that businesses expect to pass these tariff costs to customers. We believe this may initially only affect prices once.”
Moreover, he cautioned, “We must ensure this single price adjustment doesn’t spiral into serious inflation issues.”
Powell’s underscores about the robust economy signal to some analysts that a rate reduction in September might not actually happen.
“For a rate cut to occur in September, the body of the FOMC will need to be less worried about inflation or noticeably more concerned about economic growth and labor market conditions,” remarked Stephen Brown, a deputy chief economist from Capital Economics.
