Washington
CNN
—
The Federal Reserve held interest rates steady again Wednesday as officials continue to wait for the fallout of President Donald Trump’s sweeping policy changes and tensions in the Middle East.
The central bank left its benchmark lending rate unchanged at a range of 4.25% to 4.5%, where it has been since January. Economists widely expect Trump’s erratic trade war to push up prices and eventually cause unemployment to climb.
So far, Trump’s tariffs have resulted in a surge of imports into the US, which has taken a toll on economic growth. However, inflation has been tame and the labor market remains in decent shape. Still, Fed officials don’t expect that to last: New economic projections show that officials expect unemployment to rise this year more than estimated in March — and for prices to pick up more than they previously thought.
Fed policymakers overall continue to expect two rate cuts this year, according to the median projection, though seven of them expect no rate cut at all, up from four back in March.
Whenever the Fed deems it appropriate to deliver a rate cut, it’ll likely be because of rising unemployment — what investors refer to as a “bad news rate cut.” That’s because American consumers and businesses are expected to soon feel the sting of Trump’s tariffs, economists say, and there are already some potential signs of consumers becoming cautious with their spending. Retail sales, which comprise a sizable chunk of overall spending, dropped sharply last month as car purchases plummeted. That’s key because consumer spending accounts for about two-thirds of the US economy.
For now, Fed officials are inclined to wait longer for some clarity, not just on tariffs, but also to see whether a brewing conflict in the Middle East spirals out of control.
The economy’s future largely depends on what happens with trade policy. The Trump administration has so far brokered two trade agreements — with the United Kingdom and China — but the administration still has more than a hundred to go. Bilateral trade agreements typically take years of detailed discussions between countries, but Trump identified July 8 as his deadline to hash out deals with every US trading partner, before the massive tariff hikes he unveiled in early April go back into effect.
Treasury Secretary Scott Bessent last week said Trump will likely delay his tariffs even more for countries that are actively negotiating with the administration.
The Fed is patiently watching the trade situation continue to play out, but now it’s also keeping an eye on what’s going on in the Middle East.
The Israel-Iran conflict that erupted last week has escalated in recent days, with the United States mulling military involvement. The conflict has already resulted in surging global oil prices, which could translate into higher prices in the US if there continue to be disruptions to global energy supply. And even if energy prices in the US climb, it’s a high bar for the Fed to go back to hiking interest rates.
Fed officials are also keeping tabs on the president’s tax and spending bill, currently being reviewed by the Senate. The provisions in the version of Trump’s megabill that passed the House would would boost the economy 0.8% over about three decades — compared to its estimate of 1.7% for the 2017 bill, the right-leaning Tax Foundation estimates.
This story is developing and will be updated.
