People and businesses across the United States have experienced a flurry of policy shifts in recent months. Despite this, one thing has remained consistent: the cost of borrowing set by the US central bank.
On Wednesday, the Federal Reserve maintained this approach, deciding to leave its key interest rate unchanged. This marks the fourth consecutive time the Fed has chosen not to adjust rates, even though officials are now anticipating a less favourable economic outlook.
The central bank’s benchmark lending rate remains steady at approximately 4.3%, a level it has held since December. This stance comes despite internal forecasts suggesting a downturn in economic growth, higher unemployment, and rising inflation compared to earlier predictions.
Traditionally, the Federal Reserve lowers interest rates when it believes the economy is weakening and raises them when inflationary pressures grow too strong. However, recent conditions have made the decision more complex.
President Donald Trump has publicly urged the Fed to cut rates, especially as his administration has introduced sweeping economic changes, including the imposition of tariffs on imports from various countries. While the White House pushes for rate reductions, the Fed – independent in its decision-making – remains cautious.
Fed officials have expressed concern that these tariffs could result in a temporary spike in prices, potentially leading to longer-term inflation if businesses begin passing those increased costs onto consumers.
Indeed, inflation remains a concern, with the annual rate sitting at 2.4% in May – still above the Fed’s preferred 2% target. Fed Chair Jerome Powell acknowledged the risk of prices rising more quickly, particularly as tariffs take effect.
Powell explained that forecasting the precise impact of tariffs is challenging, as it depends on their size and duration. He emphasised that the prudent course for now is to maintain the current rate level, noting that the broader economy still appears stable, with a low unemployment rate of 4.2%.
Despite the current pause, projections from the Federal Reserve reveal a shift in expectations. Policymakers now foresee US economic growth slowing to 1.4% this year – a sharp decline from 2.5% last year and down from the 1.7% projected just three months ago.
Inflation is now expected to reach 3%, up from the previous 2.7% forecast. Meanwhile, unemployment is anticipated to rise to 4.5%, signalling increased pressure on the labour market.
While the outlook for rate cuts in 2025 remains largely unchanged – with most Fed members anticipating a reduction to just under 4% by year’s end – forecasts for 2026 and 2027 suggest slightly higher rates than previously expected.
President Trump, speaking before the Fed’s announcement, renewed his criticism of Powell, describing him as “stupid” and “too slow to act,” while also commenting on the remaining length of Powell’s term.
Elsewhere, central banks have taken different approaches. The European Central Bank has implemented eight rate cuts since June last year. The Bank of England, after cutting borrowing costs last month, is expected to hold rates steady this week.
Commenting on the situation, Isaac Stell, an investment manager at Wealth Club, suggested that Trump may have backed himself into a corner. He noted that central bankers are fiercely protective of their independence and may prefer to maintain their stance unless presented with an undeniable case for action.
The Federal Reserve’s decisions directly affect the rates it charges banks for short-term borrowing. These, in turn, influence interest rates across the economy, shaping the costs faced by households and businesses when applying for mortgages, credit cards, and other loans.
Although the current benchmark rate of 4.3% is lower than the 2023 peak, it is still significantly higher than the rates seen between 2008 and 2022, before the Fed began raising rates in response to inflationary pressures.
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