The Blubber

Federal Reserve officials anticipate inflation will climb in the months ahead, yet they continue to project two interest rate cuts by year-end — the same forecast they made in March.

On Wednesday, the Fed left its benchmark interest rate unchanged for a fourth consecutive meeting and noted that the economy is “expanding at a solid pace.” While changes to the Fed's rate don't always directly affect borrowing, they typically influence costs for mortgages, auto loans, credit cards, and business financing.

The central bank also issued its latest quarterly economic projections, forecasting weaker growth, higher inflation, and a modest rise in unemployment compared to its March outlook — which came before former President Donald Trump’s April 2 announcement of broad new tariffs. Many of those tariffs were delayed on April 9. The Fed now expects to cut rates only once in 2026, down from two cuts previously projected.

Officials now see inflation, based on the Fed’s preferred metric, climbing to 3% by the end of 2025 — up from 2.1% in April. Unemployment is expected to rise to 4.5%, from its current level of 4.2%. Economic growth is projected to slow to 1.4% this year, down from 2.5% in 2024.

Despite the more downbeat forecast, Fed Chair Jerome Powell and others have emphasized the importance of holding steady for now, citing uncertainty over the economic impact of tariffs. Some Fed policymakers are particularly concerned that the new duties could drive up prices and reignite inflation, which only recently began to ease after the worst surge in four decades. Many economists believe that without the tariff hikes, the Fed might already be reducing rates further.

So far, inflation has cooled, falling to 2.1% in April — nearly in line with the Fed’s 2% target. However, core inflation — which strips out food and energy — remains stubbornly high at 2.5%.

Former President Trump has cited the recent mild inflation numbers in his push for lower interest rates and has repeatedly criticized Powell for not acting. On Wednesday, Trump called Powell “stupid” and accused him of playing politics by holding off on rate cuts.

While Trump previously argued that rate cuts would stimulate the economy, his focus has recently shifted to the federal government’s ballooning interest payments — which have soared post-pandemic and are now running at more than $1 trillion annually. Economists warn that pushing the Fed to lower rates for fiscal reasons risks undermining its mandate to ensure price stability and full employment.

Trump has also criticized the Fed for holding firm while other major central banks — including those in Europe, Canada, and the U.K. — have begun easing policy. On Tuesday, the Bank of Japan kept its short-term rate at 0.5% after a recent hike, bucking the broader trend.

The European Central Bank, Bank of Canada, and Bank of England have all cut rates this year, in part due to the economic drag from U.S. tariffs. Meanwhile, the U.S. economy remains relatively strong, with unemployment still low.