Fed holds interest rates for fourth time despite tariff turmoil

Typically, the Fed lowers borrowing costs if it believes the economy is struggling and raises them if prices start to rise too quickly.

President Donald Trump has repeatedly called on the Fed to cut interest rates, while pushing major changes to economic policy, including raising tariffs on goods from around the world.

Fed officials, who are empowered to set interest rates independent of the White House, have said they are worried that a one-time jump in prices due to those new levies could morph into a more persistent problem.

Inflation, the pace of price increases, remains above the Fed’s 2% target, coming in at 2.4% in May.

Federal Reserve chairman Jerome Powell said the bank was braced for prices to rise more quickly in the months ahead as firms start to pass on the cost of the import taxes to their customers.

“That process is very hard to predict,” he said, noting that it would depend on how big the tariffs are and their duration.

“That is why we think the appropriate thing to do is hold where we are.”

He said the bank could afford to wait, noting that the economy overall remained “solid” and the unemployment rate remains low at 4.2%.

But projections released by the Fed showed that policymakers, on average, are expecting growth to slow to 1.4% this year, down from 2.5% last year and the 1.7% they were forecasting in March.

The forecasts call for inflation of roughly 3%, up from the 2.7% predicted in March and a rise in the unemployment rate to 4.5%.

The outlook for interest rate cuts in 2025 did not change significantly, with a majority of members still expecting rates to drop just below 4% by the end of the year.

But the projections anticipate slightly higher rates in 2026 and 2027 than previously forecasted.