The Federal Reserve elected to leave interest rates unchanged on Wednesday but remained on track to lower rates in the second half of 2025, as officials dimmed their view of economic growth. Even as PCE inflation measured by the US Bureau of Economic Analysis has moved closer to their 2% target this year, Fed officials have been wary to ease borrowing costs amid fears that new tariffs could stoke inflation, depress business investment, and choke off economic growth. However, members of the policy-setting committee continued to pencil in two cuts by the end of the year. The Fed’s post-meeting statement gave a nod to recent signs of progress in US trade talks, which have lifted consumer and business sentiment since the initial tariff rollout. “Uncertainty about the economic outlook has diminished but remains elevated,” the FOMC statement said. In updated economic projections released on Wednesday—the first since tariffs were announced on April 2—the Fed predicted softer GDP growth in 2025 and 2026, coupled with higher inflation, compared with previous forecasts in March.
An escalating conflict in the Middle East also has investors on alert. Oil prices jumped as a volley of air strikes between Israel and Iran threatened to crimp global flows. In equities, energy and defense companies were among the biggest gainers on Wall Street this week. Rising energy costs could have deeper macro impacts as well, with higher oil prices potentially feeding into broader inflationary pressure.
PGIM Fixed Income’s Tom Porcelli, Chief US Economist, discusses key takeaways from the Fed’s rate decision and economic outlook in a new video.
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