Fed Holds Rates, Flags Caution on Tariff-Led Inflation

The US Federal Reserve held interest rates steady on Wednesday, keeping the federal funds target range at 4.25%–4.50%, while signalling a cautious stance on potential rate cuts later in the year. The decision reflects policymakers’ concerns about persistent inflation and the growing impact of tariffs on consumer prices.

In its updated projections, the Fed maintained its forecast for two rate cuts in 2025. Inflation is now expected to stay above 3%, while GDP growth projections have been trimmed.

Federal Reserve Chair Jerome Powell emphasised patience, stating that policymakers are well positioned to wait before adjusting rates. In a press conference, he acknowledged the early effects of tariffs on inflation and described the policy environment as one of very high uncertainty.

On the Fed’s updated rate projections, commonly called the dot plot, Powell cautioned against interpreting individual forecasts too rigidly. “No one holds these rate paths with a great deal of conviction,” he said, reiterating the central bank’s data-dependent approach.

Powell also noted recent increases in short-term inflation expectations, which he linked to newly imposed tariffs. “Respondents to surveys—consumers, businesses, and professional forecasters—are pointing to tariffs as a key driver,” he said. While short-term expectations have edged up, longer-term inflation views remain aligned with the Fed’s 2% target.

He added that the inflationary impact of tariffs is still playing out. “We’re beginning to see some effects,” Powell said, noting that it will take time for higher input costs to be passed on to consumers. “Ultimately, someone has to pay for the tariffs, whether it’s the manufacturer, importer, retailer, or the consumer.”

Despite ongoing price pressures, Powell expressed confidence in the resilience of the US economy. “The US economy has defied all kinds of forecasts for it to weaken, really over the last three years,” he said, adding that there are no current signs of slowdown.

Financial markets reacted quietly. Major US stock indexes closed with marginal changes of 0.1% or less. Treasury yields inched higher, while the Dollar Index eased. Oil prices rose slightly, extending gains that pushed them to their highest level since January.