Why did US Fed chief Powell not cut the rate in June’s FOMC meeting?
As expected, the Federal Reserve maintained its key interest rate at a range of 4.25% to 4.5% on Wednesday. The Fed is taking a “wait-and-see” strategy, delaying any monetary policy measures until policymakers assess how President Donald Trump’s tariffs are impacting the economy.
Fed officials have expressed fear that tariffs may drive up inflation, despite official figures suggesting that inflation was dropping as recently as May, when the 10% tariff rate was fully implemented.
“In the run-up to the latest FOMC meeting, inflation prints (for May 2025) had not yet captured a meaningful impact of the new tariffs on US imports. This means that Chair Powell and the committee took into account both current economic conditions, which are robust, and the anticipation that domestic prices would pick up later this summer.
In this context, the FOMC meeting was in line with expectations and in line with the Fed’s dual mandate of full employment and price stability,” says Stefan Hofer, Chief Investment Strategist for APAC at LGT Private Bank.
Fed officials have refrained from decreasing interest rates due to concerns that merchants will pass on the cost of Trump’s tariffs to customers, potentially reigniting inflation as early as the second half of the year.
According to quarterly economic estimates disclosed accompanied by the interest rate decision, Fed policymakers plan to decrease rates by two quarter-points at some point this year. That’s the same amount of cuts predicted in March, before Trump unveiled his massive “Liberation Day” tariffs, which have shattered the economic forecast.
The median participant projects that the appropriate level of the federal funds rate will be 3.9 percent at the end of this year, the same as projected in March. The median projection declines to 3.6 percent at the end of next year and to 3.4 percent at the end of 2027, a little higher than the March projection.
What this means is only two rate cuts this year and one each in 2026, 2027. “The Fed continues to project two rate cuts later this year, though it anticipates only one quarter-percentage-point in 2026 and 2027,” says Jigar Trivedi Senior Research Analyst Reliance Securities.
The unemployment rate remains low, and labor market conditions remain solid and inflation remains somewhat elevated. “In our Summary of Economic Projections, the median participant projects GDP to rise 1.4 percent this year and 1.6 percent next year, somewhat slower than projected in March,” said Powell.
Does that seem like a stagflation situation, with slow economic growth, huge unemployment, and growing inflation in the economy?
“The Federal Reserve’s decision to hold rates steady while projecting a ‘stagflation lite’ scenario of 1.4% growth and 3% inflation reveals a central bank navigating unprecedented uncertainty. With seven FOMC members wanting no cuts versus eight expecting two, the internal divisions mirror broader economic confusion. Powell’s admission that tariff impacts remain unknown essentially puts monetary policy on hold pending Washington’s trade decisions,” says Subho Moulik, CEO at Appreciate.
Powell has acknowledged, “We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension. If that were to occur, we would consider how far the economy is from each goal, and the potentially different time horizons over which those respective gaps would be anticipated to close.”
“Effectively they are sitting on their hands, waiting to see if tariffs increase inflation or the jobs market starts to falter, and whichever part of their dual mandate is impacted first will likely guide whichever direction they take, although the bias is still toward cutting rates or at least keeping rates unchanged, not raising rates,” says Chris Zaccarelli, Chief Investment Officer for Northlight Asset Management.
Has Powell done the right thing by holding rates despite pressure from President Trump to cut the rate by a full percentage point? “Trump wants a full-point rate cut to offset the damage from his tariffs. But if the Fed delivers prematurely, markets will punish that kind of political submission. Long yields could spike, and the cost of capital could rise across the board,” says Nigel Green, CEO of deVere Group.
Charlie Ripley, Senior Investment Strategist for Allianz Investment Management, sums up the thought process of Fed officials. “With the committee effectively split, having 8 members signaling two rate cuts and 7 members signaling one rate cut this year, the reality is that there currently is not a strong enough consensus built amongst the Fed to pursue the next rate-cutting campaign at the very least for the next few meetings.
Notably, the Fed lowered its growth expectations to 1.4% and lifted its unemployment and inflation expectations to 4.5% and 3.0%, respectively. This tells us the concerns from the Fed around deteriorating economic conditions and rising inflation remain roughly balanced and potentially keeping Fed policy changes in the abyss for the foreseeable future.”