Fed keeps rates steady but warns about slowing economic growth, inflation risks

The Federal Reserve held interest rates steady on Wednesday while warning about slowing economic growth, despite ongoing pressure from President Donald Trump to lower rates.

The Fed kept its short-term benchmark rate unchanged at 4.25 to 4.5%, amid uncertainty over a raft of administration policies that could drag on the economy in coming months, including higher tariff rates and tougher enforcement of immigration laws. Two Fed governors – of the 11 policymakers who voted – dissented.

Fed Chair Jerome H. Powell told reporters during a news conference that Fed officials are still worried that Trump’s tariff policies will stoke inflation in the months to come.

“A reasonable base case is that the effects on inflation could be short-lived, reflecting a one-time shift in the price level. But it is also possible that the inflationary effects could instead be more persistent, and that is a risk to be assessed and managed,” said Powell, explaining the cautious move on monetary policy.

Fed officials revised their assessment about growth, saying in a statement that it had “moderated” during the first half of the year, less robust than the “solid” growth they described at their last meeting in June.

Fed governors Christopher Waller and Michelle Bowman said they preferred to cut rates immediately. It was the first time in more than 30 years that two sitting governors had dissented from an interest rate decision. Waller has argued that the Fed needs to reduce rates to bolster a weakening labor market.

Powell gave few clues about what conditions might prompt the central bank to resume cutting rates at its next scheduled meetings in September or October, saying the Fed will assess a slew of incoming data before making any decisions. Those include key inflation and labor market reports, such as the employment data for July set for release on Friday.

“We’re going to need to see the data, and it can go in many different directions,” he said. “We’re going to make a judgment based on all of the data.”

The Fed faces unprecedented pressure from Trump to cut rates immediately. That pressure campaign showed no signs of easing Wednesday. Trump took to social media, writing: “ ‘Too Late’ MUST NOW LOWER THE RATE,” he wrote, referring to Powell.

Later, he expressed surprise to reporters that the Fed wasn’t planning to cut immediately. “I hear they’re going to do it in September. Not today. For what reason? Nobody knows,” he said.

Kathy Bostjancic, chief economist at Nationwide, said the dissents don’t necessarily make a September rate cut more likely. But her firm still expects one, citing “a moderation in economic activity that should outweigh concerns about a one-time rise in inflation due to tariffs.”

The Fed remains in a tricky spot, tasked with balancing its dual mandate of maximum employment and stable inflation. Prolonged trade uncertainty risks slowing growth and unsettling financial markets, conditions that would normally prompt a rate cut. At the same time, tariffs could reignite inflationary pressures, potentially justifying higher rates instead. Some economists warn that price increases could take longer to show up than signs of a weakening economy.

Meanwhile, Powell has been subject to sometimes daily attacks from the president, who wants lower rates to help finance ballooning deficits and to bolster economic growth. Though Trump unexpectedly praised Powell after a tour of the Fed’s expansive office renovations last week, that pressure campaign will likely continue for the rest of Powell’s tenure as chairman, which ends in May.

After cutting rates by a full percentage point between last September and December, the Fed left its short-term benchmark rate unchanged all year. The Fed’s rate-setting policies trickle through the financial sector to influence what millions of consumers and businesses pay for mortgage, auto and other types of loans.

Though Trump has said lower rates would make it easier for homeowners to get a mortgage, it isn’t that simple. When the Fed cut short-term rates last year, longer-term rates for mortgages and other loans, which are dictated by the markets and not the central bank, actually rose on expectations of a stronger growth and inflation.

The Fed itself is divided on the path forward. A group of officials, including Powell, have signaled they could resume cutting in the coming months. But two Republican appointees – Waller and Bowman – had endorsed cuts as early as this week.

Waller has said recent job market data may be masking signs of underlying weakness, pointing to sluggish growth in private-sector hiring as a potential red flag for the broader economy.

While headline figures from the June jobs report appeared solid – with unemployment ticking down to 4.1% and 147,000 jobs added – Waller noted that roughly half of those gains came from state and local governments, a sector prone to seasonal distortions. In contrast, private employers added just 74,000 jobs, a sharp slowdown from prior months. He also warned those figures could be downwardly revised.

“While the labor market looks fine on the surface, once we account for expected data revisions, private-sector payroll growth is near stall speed, and other data suggest that the downside risks to the labor market have increased,” Waller said earlier this month. “With inflation near target and the upside risks to inflation limited, we should not wait until the labor market deteriorates before we cut the policy rate.”

Waller is seen as a dark-horse candidate to replace Powell when his term ends.

Other officials say the Fed can’t risk being cavalier about the Trump administration’s trade policies fueling inflation. Atlanta Federal Reserve President Raphael Bostic said inflation could remain elevated for longer than many expect, as businesses and consumers continue adjusting to shifting trade policies, domestic reforms and geopolitical uncertainty. Rather than a one-time jump in prices, Bostic warned of a more drawn-out process that could unfold over the next year or more.

Bostic pointed to the Atlanta Fed’s May Business Inflation Expectations survey, which showed firms anticipate larger price hikes than they did six months ago. Expectations for May are at their highest level in two years.

While Bostic said inflation expectations remain “anchored” for now, he warned that persistent price pressures could seep into consumer psychology – a risk he said he’s watching closely. “That would not be welcome,” he said in a July 3 speech.