WASHINGTON (Reuters) -The U.S. central bank held interest rates steady on Wednesday and policymakers signaled borrowing costs are still likely to fall in 2025, but Federal Reserve Chair Jerome Powell cautioned against putting too much weight on that view, and said he expects “meaningful” inflation ahead as consumers pay more for goods due to the Trump administration’s planned import tariffs.
“No one holds these … rate paths with a great deal of conviction, and everyone would agree that they’re all going to be data-dependent,” Powell said in a press conference after the end of a two-day U.S. central bank meeting where policymakers slowed their overall outlook for rate cuts in response to a more challenging outlook of weaker economic growth, rising joblessness, and faster price increases.
If not for tariffs, Powell said, rate cuts might actually be in order, given that recent inflation readings have been favorably low.
But a cost shock is coming, he insisted, with producers, manufacturers and retailers still involved in a complicated struggle over who will pay the levies imposed so far, and President Donald Trump still contemplating an aggressive set of import duties that could go into effect early next month.
“Everyone that I know is forecasting a meaningful increase in inflation in coming months from tariffs, because someone has to pay for the tariffs … between the manufacturer, the exporter, the importer, the retailer,” Powell said. “People will be trying not to be the ones who can pick up the cost. Ultimately, the cost of the tariff has to be paid, and some of it will fall on the end consumer.”
“We’ll make smarter and better decisions if we just wait a couple of months or however long it takes to get a sense of really what is going to be the pass-through of inflation” from the higher import taxes, Powell said.
In new economic projections released alongside the Fed’s statement, policymakers sketched a modestly stagflationary picture of the economy, with growth in 2025 slowing to 1.4%, unemployment rising to 4.5%, and inflation ending the year at 3%, 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 their 2% target.
And there was a split among the 19 policymakers, with seven of them feeling no rate cuts will be needed. That diversity of views reflects that while uncertainty over Trump’s tariff policy is down from its peak in April, it’s still “a very foggy time,” Powell said, adding that policymakers may have divergent assessments of the risk that inflation could stay persistently higher, or that the labor market could weaken.
Under the new projections, inflation will remain elevated at 2.4% through 2026 before falling to 2.1% in 2027 amid largely stable unemployment.
The projected 1.4% GDP growth this year compares to the 1.7% rate seen in the last round of projections in March, and the 4.5% unemployment rate expected at the end of the year is up from the 4.4% projected in March. The rate in May was 4.2%
So far, however, “the unemployment rate remains low, and labor market conditions remain solid,” the Fed said in a policy statement that kept its benchmark overnight interest rate in the 4.25%-4.50% range. The decision was approved unanimously.
“There’s still bias towards some version of stagnation, lower growth with rising sticky inflation,” said Jack McIntyre, portfolio manager for global fixed income at Brandywine Global. “It feels like it’s a Fed that’s still being very patient, and they’re still biased towards cutting rates in the near future.”
TRUMP LASHES OUT
The Fed’s statement did not mention the sudden outbreak of hostilities between Israel and Iran and the risk that conflict posed to global oil or other markets.
Powell said the Fed is watching the conflict “like everybody else” and that while it’s possible energy prices could rise, such price spikes generally fade and don’t have lasting effects on inflation.
“For the time being we are well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance,” Powell said. The Fed, he added, is set up to “react” to incoming information in a timely way.
U.S. stock indexes closely largely flat on the day, while the 10-year Treasury yield was mostly unchanged. Interest rate future prices continued to suggest the Fed’s September 16-17 meeting was the most likely point for the next rate cut, with another reduction in borrowing costs likely by the end of 2025.
The central bank’s latest action again ignored Trump’s call for immediate rate cuts, a move Fed officials feel would be counter to their effort to ensure inflation returns to the 2% target until key tariff changes are finalized and their effects are better understood.
As Fed officials were meeting on Wednesday, Trump called Powell “stupid” and said the policy rate should be slashed in half, the type of move usually reserved for severe economic emergencies. The president also mused about installing himself as Fed chief.
The Fed cut rates three times last year, with the last move coming in December. Policymakers, however, have been reluctant to commit to a timeline for further cuts given the volatility of U.S. trade policy, and the difficulty of estimating how the burden of higher import taxes will be spread among consumers, importers, and producing nations.
(Reporting by Howard Schneider and Michael S. Derby; Additional reporting by Matt Tracy; Editing by Paul Simao)
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