Fed Holds Rates Steady, Flags Stagflation Risk as Tariffs Fuel Inflation Fears
Summary
The Federal Reserve held interest rates steady at 4.25%-4.50% for the fourth consecutive meeting, while raising its inflation forecasts and long-term rate projections. The central bank cited rising inflation and slowing growth, acknowledging increased risks of stagflation. The Fed's path for rate cuts in 2025 remains at two, but future rate expectations have moved higher, emphasizing a data-dependent approach.
Fed Holds Rates Steady, Flags Stagflation Risk as Tariffs Fuel Inflation Fears
The Federal Reserve maintained its benchmark interest rate for the fourth consecutive meeting on Wednesday, signaling a more cautious economic outlook that brings stagflation risks into sharper focus. The Federal Open Market Committee (FOMC) kept the federal funds rate target range at 4.25% to 4.50%, navigating a challenging economic landscape characterized by persistent inflation and slowing growth.
Fed's Rate Cut Path Narrows
While the Fed's projections still anticipate two rate cuts in 2025, the longer-term trajectory for interest rates has shifted towards a less accommodative stance:
- 2026 Benchmark Rate Forecast: Revised upward to 3.6% from the previous 3.4% projection.
- 2027 Benchmark Rate Forecast: Now expected at 3.4%, up from 3.1% in March.
Fed Chair Jerome Powell emphasized the data-dependent nature of these projections, stating, "Everyone would agree that they're all going to be data dependent."
Rising Inflation, Slowing Growth: A Classic Stagflation Setup?
The central bank also raised its forecast for core Personal Consumption Expenditures (PCE) inflation, a key inflation gauge:
- 2025 Core PCE Inflation: Projected at 3.1%, an increase from the prior 2.8% forecast.
- 2026 Core PCE Inflation: Revised up to 2.4% from 2.2%.
- 2027 Core PCE Inflation: Expected at 2.1%, slightly higher than the previous 2% projection.
These upward revisions suggest policymakers are bracing for more persistent inflation, potentially influenced by factors such as:
- Tariffs implemented under President Donald Trump's trade policies.
- Potential constraints on labor supply and upward wage pressure resulting from a crackdown on immigration.
Track Upcoming Economic Data for Insight
Given the Fed's increased reliance on economic data, market participants should closely monitor upcoming high-impact releases. Utilizing resources like an Economics Calendar can help stay informed on critical data points such as inflation reports, employment figures, and further commentary from Fed officials.
For investors with exposure to inflation-sensitive assets and commodities, tracking real-time pricing and sector impacts via a Commodities data source can provide valuable insights driven by these macroeconomic shifts.