US Fed keeps rates unchanged, expects two cuts in 2025

The US Federal Reserve has held interest rates steady and policy makers signalled borrowing costs are still likely to fall this year, but slowed the overall pace of expected future rate cuts in the face of estimated higher inflation flowing from US President Donald Trump's tariff plans.

In new economic projections, policy makers sketched a modestly stagflationary picture of the US economy, with economic growth slowing to 1.4 per cent this year, unemployment rising to 4.5 per cent by the end of this year and inflation finishing 2025 at 3.0 per cent, well above the current level.

While policymakers still anticipate cutting rates by half a percentage point this year, as they projected in March and December, they slightly slowed the pace from there to a single quarter-percentage-point cut in each of 2026 and 2027 in a protracted fight to return inflation to the US central bank's 2.0 per cent target.

Under the new projections, inflation remains elevated at 2.4 per cent through 2026 before falling to 2.1 per cent in 2027 amid largely stable unemployment.

"Uncertainty about the economic outlook has diminished but remains elevated," the Fed said in its latest policy statement, a modification of language used in May, at a more turbulent moment in the trade debate when it said that the risk of both higher inflation and higher unemployment had risen.

Those outcomes were both embedded in the new projections, the Fed's latest thinking about how Trump's suite of economic policies is expected to shape the economy this year.

The 1.4 per cent growth in output this year compares to the 1.7 per cent rate seen in the last round of projections in March, and the 4.5 per cent unemployment rate expected at the end of the year is up from the 4.4 per cent projected in March.

The rate as of May was 4.2 per cent

So far, however, "the unemployment rate remains low, and labour market conditions remain solid," the Fed said in its policy statement, which was approved unanimously.

It did not mention the sudden outbreak of hostilities between Israel and Iran and the risk that conflict posed to global oil or other markets.

Fed chair Jerome Powell is scheduled to hold a press conference later on Wednesday and is likely to speak on the issue, as well as elaborate on the central bank's latest statement and economic projections.

The rate projections from Fed officials for this year at least are in line with recent market expectations for a quarter-percentage-point rate reduction as soon as the Fed's September 16-17 meeting.

The central bank continues to ignore Trump's call for immediate rate cuts, a move Fed officials feel would be counter to their effort to ensure inflation returns to their 2.0 per cent target until key tariff changes are finalised and their effects are better understood.

The Fed's current policy rate was set in the current 4.25 per cent-4.50 per cent range in December, and policy makers have been reluctant to commit to a timeline for further cuts given the volatility of US trade policy, and the difficulty of estimating how the burden of higher import taxes will be spread among consumers, importers and producing countries.