Federal Reserve maintains elevated interest rates in the U.S.
U.S. Fed Stays Put on Rates Amidst Pressure from Trump
Washington - buckling under the weight of Trump's persistent pleas for a rate reduction, the Federal Reserve opted to hold the federal funds rate steady. The interest rate remains within the range of 4.25% to 4.50%, as stated by the Federal Reserve Board in Washington D.C. The Fed expressed concern over the economic landscape's future development.
The decision aligned with the predictions of the majority of financial analysts. Since the COVID-19 pandemic, interest rates have risen sharply for the U.S. in an attempt to combat escalating inflation. This year, there have been no rate cuts, while there were two such reductions in 2022.
Anticipated Lower Economic Growth
The Fed now predicts a slower economic growth pace for the current year. The central bank is projecting a growth rate of 1.4%. In March, the Fed had already revised its economic outlook to a growth rate of 1.7%. The central bank also forecasts a higher inflation rate of 3.0%. In March, it had anticipated an inflation rate of 2.7%.
A substantial portion of the Federal Reserve Board members expect two rate cuts of 0.25 percentage points each throughout the year. As a result, the federal funds rate could end the year around four percent or slightly below.
The Federal Funds Rate and its Impact
The federal funds rate is the Federal Reserve's core tool in achieving its two critical objectives: controlling inflation and maintaining a strong labor market. This rate dictates the rate at which commercial banks can borrow funds from the central bank. In turn, it influences fees charged to customers and businesses.
For instance, if the Fed reduces the federal funds rate, banks' own loan rates will also eventually decrease, impacting mortgages, car loans, business funding, and credit card interest rates. Cheaper loans would stimulate the economy because people would have more disposable income, and credit-backed investments would become more affordable.
Trump's Demand for Lower Rates
Although the U.S. Federal Reserve's independence is legally guaranteed, this doesn't prevent President Trump from publicly seeking lower rates to further boost the economy. To emphasize his demand, he frequently berates Fed Chairman Jerome Powell. Just last week, he called him a "dummy." At times, Trump has even suggested Powell to mimic the European Central Bank's rate cuts. The ECB recently lowered its policy rate to 2.0%.
The Fed's Resistance to Lower Rates
From the Fed's point of view, there is currently no pressing need for a change in rates: The inflation rate is close to its target of 2%, and the labor market remains strong. Uncertainty regarding trade policies, especially those enacted by President Trump, complicates the situation, contributing to the Fed's caution.
High tariffs imposed or threatened by Trump on goods from multiple countries could drive up the cost of imported goods and slow growth in the U.S. Trump's tariffs also negatively impact the stock and bond markets.
Potential Consequences of a War with Iran
Geopolitical factors may be influencing the Fed's decision-making process: Escalating tensions between Iran and Israel could potentially involve U.S. military involvement, leading to turmoil in the oil market and higher oil prices that would put strain on the U.S. economy. However, the inflation rate is unlikely to cause concern for central bankers, remaining only slightly above the long-term target of around 2%. Consumer prices rose by 2.4% year-over-year in May 2025.
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- Despite Trump's continuous pressure for a rate reduction, the Federal Reserve, scrutinizing the economic landscape's future development, decided to maintain the federal funds rate, thereby indirectly affecting the business sector and finance by influencing loan rates.
- The federal funds rate, serving as a primary instrument in attaining the Fed's objectives of controlling inflation and preserving a robust labor market, can have significant implications for American businesses and finance if altered, with potential impacts on loan interest rates, mortgages, and overall economic growth.
