Fed Holds Rates Steady for Dot Plot Calls for Two More Rate Cuts in 2025

In a widely anticipated move, the US Fed kept its benchmark interest rates unchanged in the range of 4.25% to 4.5% after its June meeting concluded yesterday. This marks the fourth consecutive meeting where the Fed has opted for a pause, signaling a cautious approach as it navigates persistent economic uncertainties, particularly from the inflationary impact of President Donald Trump’s tariffs.

“Uncertainty about the economic outlook has diminished but remains elevated. The Committee is attentive to the risks to both sides of its dual mandate,” said the FOMC (Federal Open Market Committee) in its release.

Despite the current pause on rate cuts, the Fed’s “dot plot” – a visual representation of each FOMC member’s interest rate projections – still indicates a median expectation of two rate cuts by the end of 2025, totaling 50 basis points. However, a notable shift was the increase in officials forecasting no rate cuts in 2025, rising from four in March to seven in this latest meeting.

Fed Cuts Growth Forecast While Raising Inflation Expectations

Another key takeaway from the meeting was that the Fed cut the 2025 US GDP forecast from 1.7% to 1.4%. At the same time, the US central bank raised its inflation estimates. It raised he median projection for core Personal Consumption Expenditures (PCE) inflation at the end of 2025 to 3.1% as compared to the 2.8% it projected in March.

Notably, while US inflation has gradually come down over the last two years, it is still much higher than the 2% that the Fed targets. Fed chair Jerome Powell sees upward pressure on inflation amid President Trump’s tariffs. While Trump has lowered the “reciprocal tariffs” on most countries to 10%, imports from China still attract a 55% tariff. Also, there is uncertainty over the future trajectory of these rates, as they are contingent upon trade agreements.

Powell Cautions on Impact of Tariffs

In his speech, Fed chair Jerome Powell said, “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 added, “It will be someone in that chain that I mentioned, between the manufacturer, the exporter, the importer, the retailer, ultimately somebody putting it into a good of some kind or just the consumer buying it.”

Powell cautioned that the cost of tariffs, at least in part, will have to be paid by the US consumers. He said, “All through that chain, people will be trying not to be the ones who can take up the cost but ultimately, the cost of the tariff has to be paid. And some of it will fall on the end consumer.”

Fed to Play A ‘Wait and Watch’ Game

Powell, meanwhile, reiterated that the Fed is ready to play a “wait and watch” game on future rate cuts. He dashed the possibility of rate cuts in the near term, saying, “The economy seems to be in solid shape, so the labor market is not crying out for a rate cut.”

The decision to hold rates steady and circumspect commentary on future cuts was widely expected. “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),” said Chris Zaccarelli, chief investment officer at Northlight Asset Management.

Trump Has Lashed Out at Powell For Not Cutting Rates

Trump has been quite critical of Powell for not cutting rates and has on multiple occasions called for a cut. The President called Powell “stupid” and “political” ahead of yesterday’s rate decision and said, “We have no inflation, we have only success.”

To be sure, this is not the first time that Trump has urged Powell to cut interest rates. In a post on Truth Social earlier this year he said, “The ECB is expected to cut interest rates for the seventh time, and yet, “Too Late.” Jerome Powell of the Fed, who is always TOO LATE AND WRONG, yesterday issued a report that was another, and typical, complete “mess!”

He added, “Oil prices are down, groceries (even eggs!) are down, and the USA is getting RICH ON TARIFFS. Too Late should have lowered Interest Rates, like the ECB, long ago, but he should certainly lower them now. Powell’s termination cannot come fast enough!”

Notably, while Trump appointed Powell as the Fed chair, the relations between the two were quite fraught as Powell raised rates during Trump’s presidency, much to his displeasure. In a 2019 tweet, Trump questioned whether Powell or Chinese President Xi Jinping was “our bigger enemy.”

In 2022, Joe Biden reappointed Powell as the Fed chair for four years, and his current tenure would last until mid-2026. Last year, Powell indicated that he would serve his entire tenure while saying that U.S. presidents are “not permitted under the law” to fire members of the Fed.

US Interest Rates to Stay Higher for Longer

Meanwhile, the June Fed meeting reinforces the fact that US interest rates might stay higher for longer. In his statement to USA Today, Timothy Chubb, Executive Vice President and Chief Investment Officer at Girard, said, “This is a challenging environment for anyone carrying high-interest debt, applying for a mortgage, or managing a business reliant on borrowing.”

He added, “These high rates for longer disproportionately affect lower-income households and highly leveraged consumers who are more exposed to financial stress.”

Meanwhile, Chubb said, that the impact of inflation is tamed now as the growth in wages is now ahead of the pace of price rise. “American workers are seeing gains in purchasing power, even in a high-interest rate environment,” said Chubb.

Meanwhile, US stocks pared gains yesterday after the Fed meeting concluded yesterday as Powell’s commentary sounded somewhat hawkish than what markets were expecting, especially in light of the fall in inflation, with the CPI rising by only 2.1% in May, which was lower than expected.