Fed holds rates as Trump tariffs threaten inflation shock: What it means for your money

The US Federal Reserve held interest rates steady on Wednesday but signalled that rate cuts could still be on the table later this year. Yet a fresh risk has emerged on the horizon: President Donald Trump’s sweeping new import tariffs.

Fed Chair Jerome Powell warned that the new duties could trigger a surge in inflation this summer, complicating the central bank’s plan to begin easing monetary policy.

“Everyone that I know is forecasting a meaningful increase in inflation in coming months from tariffs,” Powell said, as quoted by Reuters. He warned that although inflation readings had been favourable recently, the full cost of tariffs would eventually hit consumers.

The Fed’s decision kept its benchmark overnight interest rate in the 4.25–4.50 per cent range, the highest in over two decades.

Policymakers still project two rate cuts before the end of 2025, but they have scaled back the pace of future easing amid rising uncertainty over trade policy, economic growth, and price stability.

Powell: “Cost shock is coming”

Despite the inflationary outlook improving over recent months, Powell said the Fed would need more time to understand how tariffs would impact price pressures.

“If not for tariffs, rate cuts might actually be in order,” he said, according to Reuters.

He explained that producers, manufacturers, importers, and retailers are still locked in a complex struggle over who will absorb the cost of the tariffs. “We’ll make smarter and better decisions if we just wait a couple of months or however long it takes to get a sense of what the pass-through of inflation is going to be,” he added.

Growth slows, inflation sticks, joblessness rises

The Fed’s updated economic projections revealed a stagflationary tilt. Gross domestic product growth is forecast to slow to 1.4 per cent in 2025, down from 1.7 per cent predicted in March.

At the same time, unemployment is projected to rise to 4.5 per cent by year-end, up from the 4.4 per cent earlier estimate. The unemployment rate in May was already ticking up at 4.2 per cent.

Headline inflation is now expected to end 2025 at 3 per cent—well above the Fed’s 2 per cent target. Core inflation, which excludes food and energy, is projected to stay elevated at 2.4 per cent through 2026 before finally cooling to 2.1 per cent in 2027.

This confluence of weaker growth, rising joblessness and sticky inflation underscores the Fed’s challenge: avoiding a policy misstep as tariffs and global shocks collide with domestic economic weakness.

Trump lashes out at Powell

President Trump, facing both economic headwinds and geopolitical turmoil, lashed out at the Fed during a campaign stop on Wednesday.

“Powell is stupid,” Trump said, as quoted by Reuters, demanding that the central bank “slash rates in half”—a move typically associated with financial crises or deep recessions. The president even joked about installing himself as Fed chairman.

Despite the pressure, Powell held the line. “No one holds these rate paths with a great deal of conviction,” he responded, reiterating that all decisions remain data dependent.

Fed splits as trade fog clouds outlook

The Fed has already delivered three rate cuts in 2024, the last of which came in December. But in 2025, it has hit pause—waiting for clarity on inflation, trade, and labour market resilience.

In a notable sign of internal disagreement, seven of the 19 Fed policymakers now believe no further cuts will be needed this year. “It’s a foggy time,” Powell admitted, as per Reuters, highlighting how uncertainty over Trump’s tariff trajectory is keeping policymakers divided.

Markets steady, oil climbs, geopolitics tense

The US equity markets were largely unmoved by the Fed’s decision. The Dow Jones Industrial Average slipped 0.10 per cent, the S&P 500 edged down 0.03 per cent, while the Nasdaq Composite rose 0.13 per cent.

Meanwhile, oil prices continued to climb amid the Israel–Iran conflict. Brent crude settled at 76.70 US dollars per barrel, while West Texas Intermediate rose to 75.14 dollars, both rebounding after early-session declines. On Tuesday, prices had jumped more than 4 per cent.

Geopolitics remained tense. Iranian Supreme Leader Ayatollah Ali Khamenei publicly rejected Trump’s demand for unconditional surrender. When asked if Iran’s regime might collapse, Trump responded: “Sure, anything could happen.”

Bond markets react to inflation fears

US Treasury markets reacted cautiously. The 10-year Treasury yield closed unchanged at 4.391 per cent. However, the rate-sensitive two-year yield dipped to 3.939 per cent, down 1.1 basis points from the previous session.

Earlier this year, yields had surged on 2 April after Trump unveiled higher-than-expected tariffs—spooking foreign investors and raising fears of capital flight from US debt markets. Although delayed implementation calmed the markets, Powell’s inflation warnings this week have reignited those concerns.

Retail sales slump, job market shows cracks

Recent economic data have added to the sense of slowdown. Retail sales dropped by 0.9 per cent in May—the sharpest monthly decline in four months. At the same time, jobless claims remain at levels consistent with a softening labour market.

Despite this, Powell maintained that the broader picture remains stable. “Labour market conditions are still solid,” he said, echoing the Fed’s official statement.

What lies ahead?

The next Fed meeting is scheduled for 16–17 September, with traders now seeing that as the earliest possible window for a rate cut. But much depends on the actual implementation of Trump’s tariff package—and whether its impact is absorbed or passed directly onto households.

“For the time being, we are well positioned to wait to learn more about the likely course of the economy,” Powell said, as quoted by Reuters.

With markets closed on Thursday for the Juneteenth holiday, investors are bracing for a volatile second half of the year.

(With inputs from the agencies)