Federal Reserve to Keep Interest Rates Unchanged

By Howard Schneider

WASHINGTON (Reuters) – The Federal Reserve is expected to keep interest rates unchanged on Wednesday while evaluating signs of a cooling economy and inflation risks due to U.S. import tariffs and escalating Middle East tensions.

Since setting its benchmark interest rate between 4.25%-4.50% in December, the Fed has noted a cloudier economic outlook, particularly after President Trump’s return to power and his overhaul of trade policy, which includes sharply higher levies on imports.

While many tariffs have faced delays, the concerns remain at the forefront for U.S. central bank officials. Oil prices surged after last week’s conflict between Israel and Iran, and various economic indicators suggest growth might be weakening.

Fed officials seek clarity on the economy’s trajectory regarding inflation and employment before providing new guidance on interest rates. Currently, the possibility of rising prices and slowing jobs remains.

A National Association for Business Economics survey revealed economists anticipate GDP growth in 2025 to decline to 1.3% from a previous 1.9%, with year-end inflation at 3.1%, exceeding the Fed’s 2% target. The unemployment rate, recorded at 4.2% in May, is expected to be 4.3% by year-end, climbing to 4.7% in early 2026.

‘PARALYZED BY TRUMP’S UNCERTAINTY’

Given the uncertainty surrounding Trump’s policies and risks to the Fed’s goals, investors suggest the central bank may remain anchored for months without further rate cuts until September, despite Trump’s call for immediate reductions in borrowing costs. The Fed cut rates three times in 2024.

Dario Perkins, an economist at TS Lombard, noted that the Fed appears paralyzed by the uncertainty tied to Trump’s policies. Central bankers are traditionally conservative, choosing to wait and see how upcoming months will address their dilemmas.

The Fed plans to release its policy statement along with updated projections at 2 p.m. EDT (1800 GMT) on Wednesday after its latest two-day meeting, followed by a press conference with Chair Jerome Powell half an hour later.

Michael Feroli, chief U.S. economist at JP Morgan, does not foresee substantial changes in the policy statement, given solid job growth, ongoing inflation above the Fed’s target, and elevated uncertainty. However, policymakers’ projections will provide insights into anticipated economic changes and necessary responses from monetary policy.