Fed holds rates steady, but officials split on policy outlook
Published: 19:49 18 Jun 2025 BST
The Federal Reserve held its benchmark interest rate steady at 4.5% on Wednesday, as widely expected, while signaling a slower path to rate cuts and revealing a sharply divided policy committee.
In updated projections, the Fed now anticipates two rate cuts totaling 50 basis points in 2025, followed by one 25-basis-point cut each in 2026 and 2027. The central bank also acknowledged that "uncertainty about the outlook has diminished, though it remains elevated."
Economic forecasts reflected a slightly gloomier view of the year ahead. The Fed lowered its 2025 GDP growth projection to 1.4% from 1.7%, while raising its inflation expectations. Headline PCE inflation is now seen at 3%, up from 2.7%, and core PCE inflation is expected to rise to 3.1% from 2.8%. The unemployment rate forecast ticked up to 4.5% from 4.4%.
The decision highlighted a split within the Federal Open Market Committee (FOMC). Of the 19 officials, nine projected fewer cuts than the median, including seven who foresee no further rate reductions in 2024 and two who expect just one.
This internal divide underscores broader skepticism among market participants about the Fed’s policy path and its emphasis on inflation risks. “The Fed continues to overplay the inflation story and isn't paying attention to burgeoning demand weakness,” said Jamie Cox, managing partner for Harris Financial Group.
“While the dot plot forecasts three rate cuts through 2026, the more likely scenario is three rate cuts by the end of 2025.”
The disconnect reflects growing uncertainty around the timing of rate cuts, particularly in light of recent geopolitical and policy developments. “In short, the FOMC decision signals that the FOMC still think they could cut rates this year,” noted Comerica’s Bill Adams, “but are less confident about that view than they were before April’s tariff hikes and the outbreak of the Israel-Iran war.”
