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The Federal Reserve cut its outlook for the US economy on Wednesday, with policymakers split on whether they would be able to reduce interest rates at all this year as Donald Trump’s tariffs bring risks of higher inflation.
The Fed left borrowing costs on hold for the fourth meeting in a row, with seven rate-setters saying they now expected the federal funds target range to remain at 4.25-4.5 per cent for the duration of 2025.
In March, just four officials expected no rate cuts this year. Eight officials still think they will cut interest rates by a quarter point twice this year, compared with nine in March.
Fresh projections showed growth in the world’s largest economy would come in at 1.4 per cent for 2025 — substantially weaker than last year, with unemployment rising from its current level of 4.2 per cent to 4.5 per cent and personal consumption expenditures inflation increasing from an April figure of 2.1 per cent to 3 per cent.
In March, the median expectation among US rate-setters was for the economy to expand by 1.7 per cent, unemployment to rise to 4.4 per cent and personal consumption expenditures inflation to hit 2.7 per cent.
Treasury yields dropped and US stocks jumped following the decision. The two-year yield, with moves with interest rate expectations, fell to session lows.
Fed officials have indicated that President Trump’s tariffs raise the risk of stagflation, pushing up inflation rising and slowing economic growth. Two officials are now saying interest rates will fall just once, compared with four ahead of Trump’s “liberation day” announcements. Two officials are still anticipating three quarter-point cuts.
This is a developing story
