Live Updates: Fed Sees Higher Inflation and Lower Growth Ahead
Officials at the Federal Reserve left interest rates unchanged, as they brace for the effects of President Trump’s policies on trade, taxes and immigration. Fed Chair Jerome Powell said that “uncertainty is unusually elevated.”
The Federal Reserve kept interest rates unchanged again in June, keeping them paused at a range of 4.25 percent to 4.5 percent, where they have been since January.
The Fed’s decision, along with new economic projections and a news conference with Jerome H. Powell, the chair, shed additional light on the path ahead for borrowing costs.
Here are the key takeaways:
No urgency to cut rates quickly
The Fed sees little urgency to lower interest rates anytime soon. Mr. Powell repeatedly said that the central bank was “well positioned” to navigate through what is still a very uncertain economic environment given President Trump’s tariffs and other policies that could weigh on economic growth.
He pointed to the fact that unemployment is still low, wages are still moving up and growth overall is still “decent.”
Unanimous about today but not the path ahead
The decision to hold interest rates steady was unanimously supported by all voting members of the Fed. Looking ahead, finding a consensus among all the policymakers may get more challenging.
While most officials stuck with earlier forecasts that the Fed will be able to cut borrowing costs by half a percentage point this year, or two quarter-point moves, nine of the 19 policymakers forecast the Fed doing less.
Seven penciled in no more reductions this year, while two predicted just one quarter-point move.
Mr. Powell sought to play down any type of dissension ahead. “No one holds these rate paths with a lot of conviction,” he said.
Stagflation is still a risk
While Mr. Powell did not use this word directly during the news conference, the outlook sketched out by officials in their new projections much more closely resembles a stagflationary shock than what they penciled in just three months ago.
That entails inflation accelerating while unemployment rises and growth turns more sluggish. Such a situation would put the Fed’s dual mandate of maximum employment and stable prices in tension.
Mr. Powell warned that the Fed could find itself in a situation in which its goals of 2 percent inflation and a healthy labor market are at odds with one another. He said officials would consider the distance from those goals and the time needed to get back to those desired levels.
The Federal Reserve held interest rates steady on Wednesday as expected, but new projections released alongside the decision showed officials are extremely divided about how significantly they will be able to lower borrowing costs this year as they brace for inflation to rise sharply as growth tumbles.
The central bank paused interest rate reductions in January following a series of cuts in late 2024 that lowered borrowing costs by a percentage point. In the months since, officials have maintained a “wait-and-see” stance, seeking greater clarity on how President Trump’s policies will affect the economy before making any major policy moves.
Wednesday’s unanimous decision, which kept interest rates at a range of 4.25 percent to 4.5 percent, shows that this approach still holds at a time when there is still vast uncertainty about which countries will be tariffed and at what rate; how expansive the administration’s immigration crackdown will be; and whether Republicans will be able to slash taxes and cut spending as their bill making its way through Congress intends.
The Fed now must also contend with an escalating conflict between Israel and Iran, which has further clouded the economic outlook.
Still, the Fed said in a statement on Wednesday that uncertainty about the economic outlook had “diminished but remains elevated.”
New projections released on Wednesday show that some officials still see a path to lower interest rates this year despite a higher risk of a stagflationary shock, in which inflation accelerates as growth turns sluggish. But many do not, teeing up a potential clash among policymakers in future rate decisions.
Nine of the 19 policymakers penciled in fewer cuts this year, with seven forecasting no more reductions and two predicting just one quarter-point move.
The forecasts suggest the Fed will remain at odds with Mr. Trump, who has demanded significantly lower interest rates from the central bank. The president has for months pressured the central bank to reduce borrowing costs, repeatedly lambasting Jerome H. Powell, the Fed chair, and at one point raising the prospects of terminating him before his leadership term is up in May 2026.
Mr. Trump revived those attacks as recently as Wednesday, just hours before the Fed’s rate decision. He repeatedly called Mr. Powell “stupid” and floated the idea of installing himself as chair of the central bank as he called for borrowing costs to drop by 2.5 percentage points. That is significantly more than what policymakers at the Fed suggest is appropriate.
By the end of 2026, most officials expected interest rates to decline to a range of 3.5 percent to 3.75 percent, less than what was projected in March. Officials maintained that over a longer time horizon, the so-called neutral rate, which neither speeds up nor slows down demand, had steadied at 3 percent.
Policymakers at the Fed now expect the economy to grow only 1.4 percent this year, down from 1.7 percent in March. They also predict unemployment to rise to 4.5 percent, higher than their estimates three months ago and above the current 4.2 percent rate.
Officials simultaneously lifted their year-end forecast for “core” inflation, which strips out volatile food and energy prices and is seen as the most accurate gauge of underlying price pressures, to 3.1 percent. That is up from 2.8 percent in March and 2.5 percent in December.
The forecasts underscore how significantly Mr. Trump has upended the economic outlook since his return to the White House. Recent data, which does not yet reflect the full effects of the president’s policies, suggested that the Fed was close to having in hand an elusive “soft landing,” in which it tamed inflation after a surge following the pandemic without tanking the economy.
Overall inflation has stayed muted in recent months, even as the core measure has proved slightly stickier, and it is now within spitting distance of the Fed’s longstanding 2 percent target. Many companies have held off passing along price increases to their customers and are still working through stockpiles of inventory they amassed earlier this year to avoid the higher costs associated with the tariffs.
The labor market has cooled off as employers have scaled back on hiring, and fewer Americans enter the work force. Claims for unemployment benefits have started to creep up but layoffs overall remain low, helping to keep the unemployment rate remarkably stable around 4.2 percent.
This relatively benign backdrop has given the Fed confidence that it can afford to be patient before taking any action on interest rates. If the central bank moves too quickly to lower interest rates, it risks inflaming inflationary pressures that are already poised to flare back up because of Mr. Trump’s tariffs. On the flip side, if it waits too long to cut, it could cause undue economic damage.
With such high stakes, officials have signaled that they want to have in hand tangible evidence on which way the economy is breaking before making any big decisions. That suggests the Fed’s wait-and-see approach will endure throughout the summer, postponing until September at the earliest what is likely to be an intense debate about the path forward for borrowing costs.
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Powell has just wrapped up his press conference. Takeaways coming shortly.
Asked about the conflict between Israel and Iran, Powell says it is possible that we will see higher energy prices, but stressed that in the past, those spikes have receded over time. “We’re watching, like everybody else is, what’s going on.”
Powell is asked about the impact of staffing cuts at federal statistical agencies. He says the Fed has the data it needs to do its job right now. But he says he is worried that job and budget cuts could lead to more volatility in the data and that could make it harder to get a clear read on the direction of the economy. High-quality statistics are “a huge public good,” he said, adding “I hate to see us cutting back on that.” Powell added that “I would want to continue investing in that for the good of the general public.”
The 2-year Treasury yield has risen since an initial drop in the wake of the Fed’s interest rate decision. Having dropped almost 0.1 percentage points, it has since risen back to trading roughly flat for the day at 3.9 percent.
Alongside the rise in Treasury yields, the dollar has also risen and is now 0.1 percent higher for the day.
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Powell is throwing water on the Trump administration’s view that Americans don’t pay for tariffs. “Everyone that I know is forecasting a meaningful increase in inflation in coming months from tariffs, because someone has to pay for the tariffs,” he said.
This was an unusually sharp comment from Powell, who sounded almost frustrated by the question.
“The labor market is not crying out for a rate cut,” says Powell, doubling down on his message that the Fed can take its time before making big decisions on interest rates.
The S&P 500 has fallen sharply over the last 15 minutes and is now slightly lower for the day. It appeared investors were reacting to Powell’s comments on inflation, immigration policy and tensions with Trump.
Powell said that “without tariffs” confidence that inflation is coming down would be building.
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Policy is “modestly restrictive,” Powell says, meaning interest rates are high enough to weigh on economic activity.
People (reasonably!) make fun of the way Fed watchers parse every word of Powell’s. But there really is a difference between thinking that policy is “modestly restrictive,” as Powell says now, and “moderately restrictive,” as he was saying a few months ago.
Powell said that higher inflation forecasts are due to the effects of U.S. tariffs, which were increased substantially in April.
Powell declines to comment on immigration policy, but he notes that a reduction in immigration is likely leading to slower growth in the supply of labor at the same time that the cooling economy is resulting in less demand for workers. That is part of why the unemployment rate has risen only slowly as job growth has slowed.
Asked why the Fed’s policy settings are not at a neutral setting, meaning that it neither revs up nor reduces demand, Powell points to the fact that officials are bracing for a “meaningful amount of inflation to arrive in the coming months, and we have to take that into account.”
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Officials’ economic projections show how significant the uncertainty is right now. They think inflation could end the year at anywhere from 1.3 percent to 4.1 percent. They think G.D.P. could grow anywhere from 0.2 percent to 3.2 percent this year. The unemployment rate could fall to 3.6 percent or rise to 5.2 percent. And that’s just in the six months that remain of this year — next year is even more uncertain.
Those figures are based on officials’ estimates of the middle 70 percent of expected outcomes — not even the most extreme possibilities they could imagine.
“We have a pretty healthy diversity of views on the committee,” says Powell when asked about the very wide dispersion in the rate projections published today. He stressed, however, that there was “strong support” for the decision to hold rates steady.
Powell said he expects to have a lot more clarity on tariffs this summer. The Trump administration is in active trade negotiations with countries that could determine whether the global tariffs he has threatened on nearly all trading partners go into effect remain paused. Those levies are expected to snap back in early July.
Nothing about Powell’s message so far today suggests the Fed is preparing to imminently lower interest rates. He continues to convey that policy is in a good place. As long as the economy is solid, “we feel like the right thing to do is to be where we are.”
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“Uncertainty” is definitely the word of the day. “No one holds these rate paths with a great deal of conviction,” Powell says when asked about expectations for further rate cuts.
And while forecasting is always a challenge, Powell says the current uncertainty makes it even more difficult. “It’s a hard thing to do, particularly at this time.”
Powell says the labor market continues to look solid, despite concerns that unemployment could begin to rise. “You can see perhaps a very, very slow continued cooling, but nothing that’s troubling at this time,” he says.
Powell says that many companies will pass some or all of the tariffs down the supply chain and to the consumer. He added that the duration of the tariffs remain “highly uncertain.”
Stocks are higher since Powell began to talk. The S&P 500 is 0.5 percent higher and close to its high for the day. Still, the moves across markets, including stocks, are small, suggesting today’s meeting has so far been broadly in line with investors’ expectations.
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Powell says the Fed can’t assume that tariff-induced inflation will ease, as policymakers essentially penciled into their forecasts. “Our job is to make sure that a one-time increase in inflation doesn’t turn into an inflation problem.”
So far, there is little sign that tariffs have led to faster inflation. Our own Colby Smith asks Powell how that affects how the Fed is thinking about the economy. Powell says there are some hints of tariffs showing up in individual price categories, such as electronics, but says it will take time for the effects to show up in the data more broadly.
Powell says policymakers expect tariffs to lead to higher prices, but it is “highly uncertain” how big those effects will be or when they will hit. He says the Fed is well-position to react when they do begin to see the effects.
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Investors have a lot to worry about at the moment.
There are tariffs and the growing federal deficit; immigration raids that have targeted businesses across the country; and, most recently, another major war in the Middle East, between Israel and Iran. Consumers are worried, business confidence is low, and corporate profits are expected to fall.
Despite it all, stocks are climbing.
The S&P 500 is not far below its record high and the volatility that racked financial markets just two months ago has quieted.
There are reasons for this: The worst anxiety whipped up in April by President Trump’s trade war has abated as the White House has delayed tariffs, offered carve-outs and hailed agreements with trading partners that signal his willingness to back down from a hard-line stance. Plus, inflation data continues to show that tariffs have yet to lead to sharply higher consumer prices. And while investors worry about the impact of deportations and federal staffing cuts on the labor market, so far the data shows that the economy remains resilient.
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