Yesterday, the Federal Reserve’s monetary policy committee kept the target range for its policy interest rate at 4.25 to 4.5 percent, unchanged since December 2024. The decision came as no surprise to market participants who, despite President Trump’s recent clamor for rate cuts, widely expected the Fed to hold steady amid ongoing economic uncertainty.
At the post-meeting press conference, Fed Chair Jerome Powell said the committee continues to view the economy as being in a solid position. He emphasized that the unemployment rate remains low and that the labor market is at or near full employment. He acknowledged, however, that inflation is still running above the Fed’s two-percent long-run target.
Echoing his remarks in May, Powell noted that the specter of new tariffs prompted an unusual surge in imports, which temporarily distorted first-quarter GDP measurement. Even so, he pointed to solid underlying demand: private domestic final purchases — which exclude net exports, inventory investment, and government spending — rose at a 2.5 percent annual rate.
Powell noted that wage growth has continued to moderate while still outpacing inflation, and payrolls have increased over the past three months. The unemployment rate, he noted, remains low at 4.2 percent and has stayed within a narrow band for the past 12 months. Overall, Powell concluded that key indicators point to a labor market that is broadly in balance.
Nonetheless, the summary of economic projections, also released Wednesday, indicates that the committee sees higher unemployment later this year. The median unemployment rate projection inched up to 4.5 percent from 4.4 percent in March, likely reflecting the committee’s concerns about slower economic growth in the second half of the year.
At the same time, Powell cautioned that surveys of households and businesses continue to reflect declining sentiment and heightened uncertainty, largely stemming from unresolved trade policy tensions. He noted that it remains unclear how these sentiments could influence future spending and investment. This concern can be seen in the committee’s projections of GDP growth. The median projection now puts real GDP growth at 1.4 percent in 2025, down from 1.7 percent in March and 2.1 percent in December.
On prices, Powell noted that both market- and survey-based measures of inflation expectations have edged up in recent months, with rising tariffs cited as the primary driver. But he emphasized that longer-run inflation expectations remain well anchored near the Fed’s two-percent target. Nonetheless, the median inflation projection for 2025 rose to 3.0 percent, up from 2.7 percent in March and 2.1 percent in December.
Powell noted that the effects of tariffs on inflation will depend on their ultimate level. He explained that although it now appears tariffs will be set lower than many had anticipated in April, this year’s increases are still likely to raise prices and slow economic activity.
Consistent with his remarks in May, Powell noted that any inflation brought on by the higher tariffs could be short-lived, amounting to a one-time shift in the overall level of prices, also warning that if prices do not respond quickly to the higher tariffs, the inflationary effect could prove more persistent. Whether that happens, he noted, will depend on the magnitude of the tariffs and the speed at which they pass through to prices.
To prevent a one-time increase in the price level from turning into a broader inflation problem, Powell reiterated that the committee is fully committed to keeping the public’s long-run inflation expectations anchored at two percent. He explained that meeting this obligation could require placing greater emphasis on the price-stability side of the Fed’s mandate, noting that sustained price stability is essential for maintaining strong labor market conditions.
Powell again cautioned that ongoing uncertainty could create tension between the prongs of the Fed’s dual mandate: price stability and maximum employment. If such a conflict arises, he explained, the committee would assess how far inflation and unemployment are from their respective goals — and how long it might take for those gaps to close — before adjusting policy accordingly.
Despite holding the policy rate target steady, the median projection for the policy rate suggests the Fed is likely to begin cutting rates later this year. The median projection for the federal funds rate remained at 3.9 percent — 35 to 60 basis points lower than the current federal funds rate target.
Powell explained that Fed officials are wrapping up the five-year review of the Fed’s monetary policy framework. He reiterated that they remain committed to incorporating the lessons learned over the past five years. The review, Powell explained, should be completed later this summer, at which point the Fed will release an updated Statement on Longer-Run Goals and Monetary Policy Strategy.
Powell’s remarks during the Q&A shed further light on the Fed’s wait-and-see posture. He explained that while the committee expects the new tariffs to feed through to the price level, there is still uncertainty about the size and timing of that effect. Given the overall strength of the economy, he said, Fed officials have the flexibility to let events unfold before deciding whether a policy response is warranted.
Taken together, Powell’s remarks highlighted three key themes: inflation remains elevated, uncertainty surrounding tariffs is clouding the outlook, and the broader economy is strong enough to give the Fed room to wait. Rather than pre-committing to rate cuts, Powell emphasized the importance of letting the data guide decisions. The message was clear: the Fed is no longer operating under extraordinary forward guidance — it’s back to a more traditional, data-dependent approach.