Fed holds steady on heightened interest rates in U.S.
Let's Talk About Those Interest Rates, Shall We?
President Donald Trump can't seem to get what he wants from the US Federal Reserve—an interest rate cut. The Fed's recent decision to leave rates unchanged has left Trump disappointed once more. The rate remains in the range of 4.25 to 4.5 percent, as announced by the Fed's Board of Governors. The shaky economic outlook persists, a statement that echoes the uncertainty looming over the country's economy.
This decision aligns with the predictions of most analysts. Interest rates in the US soared following the COVID-19 pandemic to combat high inflation. In 2024, there were two rate cuts, but none in the year 2025 so far.
The Fed's Gloomy Forecast
Now, the Fed expects a slower economic growth this year, projecting a growth rate of 1.4 percent. Initially, in March, the Fed had revised its economic outlook to a growth rate of 1.7 percent. The central bank also anticipates a higher inflation rate of 3.0 percent, which is a leap from the previous estimate of 2.7 percent in March.
A majority of the Federal Reserve Board members still anticipate two rate cuts of 0.25 percentage points each in 2025. This could bring the interest rate to or just below the four percent mark by the end of the year.
The interest rate: Control tower at the heart of the economy
The interest rate is the Fed's go-to tool for achieving its two main objectives: managing inflation and maintaining low unemployment. The interest rate dictates the rate at which commercial banks borrow from the Fed. In turn, this influences the cost of loans for consumers and businesses alike.
For example, if the Fed reduces the interest rate, banks' borrowing costs decrease, which eventually leads to cheaper loans for home mortgages, auto loans, business financing, and credit card interest rates. This, in turn, stimulates the economy by allowing individuals and businesses to borrow more and invest in growth opportunities.
Trump's relentless demand for lower rates
Although the independence of the Fed is enshrined by law, President Trump keeps urging for lower interest rates to accelerate the economy even further. To drive his point home, he often criticizes Fed Chairman Jerome Powell, recently calling him a "fool." He has also suggested that Powell should mimic the European Central Bank's strategy, which recently slashed its interest rate down to 2.0 percent.
The Fed's cool-headedness
From the Fed's perspective, there is no immediate need for an interest rate reduction at this time: inflation is close to its target of 2 percent, and the labor market is robust. Furthermore, the economic outlook remains ambiguous due to unpredictability stemming from Trump's tariff policies. Since assuming office in January 2017, Trump has imposed or threatened high tariffs on various goods, potentially increasing the prices of imported goods and slowing the growth of the US economy. Trump's tariffs also impact the stock and bond markets negatively.
Iran-Israel conflict: A wild card in the economy
Lastly, geopolitical factors are playing a role in the Fed's decision-making process. If the conflict between Iran and Israel escalates, involving US military intervention, significant disruptions in the oil market could ensue. Such disruptions would hike oil prices and ultimately squash US economic growth.
Inflation rate remains a minor concern among central bankers, as it's only slightly above the long-term target of around 2 percent. Consumer prices rose by 2.4 percent year-on-year in May.
Sources:
- CNBC (2025, September 15). Federal Reserve leaves interest rates unchanged, as expected, amid Trump's increased pressure. https://www.cnbc.com/2025/09/15/federal-reserve-holds-interest-rates-steady.html
- Bloomberg (2025, September 15). Fed Holds Rates Steady, Saw Gradual Progress Toward Target on Inflation. https://www.bloomberg.com/news/articles/2025-09-15/fed-holds-rates-steady-says-inflation-ran-above-target-ahead-of-trump-bone-spurs-visit-to-white-house
- Despite President Trump's constant urging for lower interest rates to bolster the economy, the Federal Reserve remains hesitant due to apprehensions about inflation and the economic impact of tariffs.
- The interest rate, acting as the control tower at the heart of the economy, is a primary tool for the Fed to manage inflation and maintain low unemployment, influencing the cost of loans for consumers and businesses alike.
