US | Fed holds as it waits for further clarity on the effects of policy changes

Summary

Powell signaled in the Q&A two complementary factors behind unchanged interest rate projections, which still point to 50bp worth of rate cuts later this year: i) weaker growth but higher inflation which “[...] kind of balance each other out”; and ii) uncertainty.

Key points

• Key points:
• The Fed kept the fed funds rate unchanged at 4.25-4.50% and noted in the policy statement that “uncertainty around the economic outlook has increased.”
• The Fed sees slower growth and higher inflation. It lowered its 4Q25 GDP growth median projection to 1.7% (from 2.1%) and to 1.8% for 4Q26 and 4Q27.
• The median core PCE inflation projection for the fourth quarter is now 2.8% (up from 2.5%). The forecasts for 2026 and 2027 were left unchanged at 2.2%.
• The “dot-plot” still shows two rate cuts in 2025, but also reflects that more members are in no hurry to change the monetary policy stance.
• We continue to think that the door to resume the rate cut cycle could open in late 2025 and, thus, we continue to expect two rate cuts this year, but uncertainty is high.

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