Fed keeps rates on hold, remains cautious in light of darkening economic and geopolitical outlook

The Federal Reserve kept its benchmark interest rate unchanged on Wednesday, as widely expected. While US policymakers reiterated that some rate cuts are still anticipated this year, they tempered the expected pace of those cuts due to heightened inflation risks and uncertainty surrounding the Trump administration’s proposed tariff plans.

Adopting a more cautious tone, the central bank dialed back hopes for imminent rate reductions, leaving investors wary amid a challenging backdrop of geopolitical tensions, inflationary pressures, and potential economic drag from new tariffs.

Despite the Fed’s more hawkish stance, markets continue to price in two 25-basis point rate cuts in 2025—one between September and October, and another in December.

In its latest economic projections, the Fed slightly raised its inflation outlook, revising its 2025 forecast to 3% from the 2.7% estimate released in June. At the same time, it downgraded its economic growth projection for 2025 to 1.4%, down from 1.7% in March, underscoring a cloudier short-term outlook.

This more muted economic assessment, combined with the deepening crisis in the Middle East and the threat of rising energy prices, overshadowed the relief markets had briefly felt following a softer-than-expected core inflation reading for May.