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Fed Still Leaning Toward Cutting Rates This Year Despite Slower Inflation Progress
The Fed kept rates unchanged while leaving the door open for potential cuts if inflation and growth trends support a shift.
- Monetary Policy
- Central Banks
- Markets & Economy
- Federal Reserve
Key Points
What it is
We analyze the Fed’s decision to hold rates steady and Powell’s remarks on balancing inflation, growth, and uncertainty.
Why it matters
Investors are watching how the Fed navigates inflation pressures and growth uncertainty, looking for clues about potential policy direction.
Where it's going
Rate cuts remain possible, but timing will depend on inflation trends and how broader economic conditions unfold.
Following the Fed’s widely anticipated decision to keep its main unchanged, Fed Chair Jay Powell delivered remarks at the press conference on Wednesday that broadly aligned with our outlook on interest rates. Despite a likely stalling of inflation in the near term, we still anticipate the equivalent of two to three 25 rate cuts this year. Let’s take a closer look.
The Fed’s updated forecasts showed an upward revision of 30 basis points to the median policymaker projection of for this year. Powell cited higher tariffs as an important factor, with the median projection now showing no further inflation progress in 2025. He noted that the Fed’s “base case” is that the effect of tariffs on inflation will be transitory, as happened following tariff hikes during the first Trump administration. He then remarked that “it can be appropriate” for monetary policymakers “to look through inflation, if it’s going to go away quickly.”
While the price-stability side of the Fed’s dual mandate has played a dominant role in policy decisions since the COVID pandemic, we have long anticipated that the employment side of the dual mandate would play a more equal role in Fed deliberations this year. Powell reinforced this view yesterday, stating that when considering the future direction of policy at this meeting, “weaker growth” and “higher inflation…kind of balanced each other out.”
Powell described macro uncertainty as “unusually elevated.” Among Fed policymakers, the rise in uncertainty was particularly noticeable in their outlook for GDP growth. Nearly all policymakers now see growth uncertainty as higher than the average levels of the past 20 years. This is a remarkable change from the previous projections, when only about half of the policymakers held that view. Powell alluded to “tariffs being put on and taken off” as a likely contributor to higher uncertainty, which could weigh on business and consumer spending. This reinforces our view that, despite inflation likely stalling in the near term, the Fed appears set to resume later this year.
The Federal Open Market Committee (FOMC) of the Federal Reserve holds eight regularly scheduled meetings a year to review economic and financial conditions and determine monetary policy. It sets the federal funds rate target, which is achieved through open market purchases by the Federal Reserve and has a broad impact on interest rates in the financial system and the economy. The committee consists of 12 members from regional reserve banks.
The Federal Reserve's policy rate is the federal funds rate, the interest rate at which depository institutions such as banks lend reserve balances to other depository institutions overnight. The Fed adjusts the rate as a way to implement monetary policy, which may impact economic growth and inflation.
A basis point is 1/100th of 1%, or 0.01%. Basis points often are used to quantify interest rates, bond yields and investment returns.
Core inflation, based on the Consumer Price Index, does not include more volatile food and energy prices in order to more clearly identify inflation trends.
Main Point
Fed holds rates steady, but cuts remain possible
The Fed kept its main policy rate unchanged, as expected, with Powell noting ongoing inflation pressures and economic uncertainty. While policymakers remain cautious, they still see room for rate cuts later this year if conditions support an adjustment.
What Spooks Investors? Widespread Uncertainty
Antulio N. Bomfim
Head of Global Macro – Global Fixed Income
Antulio Bomfim, head of global macro for the global fixed income team, oversees interest rate strategy, systematic volatility, liquidity and monitoring of systemic risk globally. He is also responsible for the firm’s global liquidity management business.
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