Fed Holds Rates, Warns of Higher Inflation—Will 2025 Rate Cuts Still Happen?

Is the Fed Losing Confidence in Rate Cuts?

The Federal Reserve held interest rates steady at its latest policy meeting, emphasizing heightened uncertainty driven by trade tariffs. While Chair Jerome Powell reiterated expectations for two rate cuts in 2025, he signaled that policymakers are hesitant to move without clearer economic data.

The Fed’s cautious stance comes as inflation remains elevated and economic growth projections decline. Despite the uncertainty, markets rallied on the central bank’s commitment to eventual easing.

How Big of a Problem Is Inflation Becoming?

The Fed raised its inflation forecast for 2025, expecting prices to rise 2.7% by year-end, up from the current 2.5% and well above its 2.0% target. Powell acknowledged that tariffs are contributing to inflation but suggested the effect could be temporary. However, some economists warn that inflation pressures may be more persistent than the Fed anticipates.

At the same time, economic growth projections were revised lower. The Fed now expects GDP to grow just 1.7% in 2025, down from a previous estimate of 2.1%. This combination of slowing growth and rising prices has sparked concerns about stagflation—a scenario where the Fed may be forced to keep rates higher for longer despite a weakening economy.

Why Did Markets Rally Despite the Uncertainty?

Despite the Fed’s cautious tone, equity markets surged. The S&P 500 climbed 1.08%, the Dow Jones added 0.92%, and the Nasdaq jumped 1.41%—its best Fed-day performance since November. Investors cheered the central bank’s decision to maintain its forecast for two rate cuts, even as policymakers signaled greater uncertainty.

Bond markets also reacted, with the 10-year Treasury yield dropping to 4.257%, its lowest level in over a week. Futures markets are now pricing in an 81.2% chance that the Fed will hold rates steady at its next meeting and a 53.1% probability of a rate cut by June.

What’s Next for the Fed and the Economy?

Powell played down recession fears, but some analysts are less optimistic. BMO Capital’s Scott Anderson warned that upcoming economic data could reveal weaker consumer spending and a slowing labor market. Meanwhile, Goldman Sachs’ Whitney Watson described the Fed’s projections as having a “stagflationary” feel, given the mix of higher inflation and slowing growth.

For now, the Fed remains in wait-and-see mode. The next few months will be critical as policymakers assess the impact of tariffs and inflation data. Markets will be watching closely to see whether the Fed sticks to its plan for rate cuts—or if uncertainty forces another shift in policy.

More Information in our Economic Calendar.