Fed keeps rates steady, but sees fewer cuts next year on stagflation concerns

Investing.com -- The Federal Reserve left interest rates unchanged for a fourth-straight meeting Wednesday, but flagged stagflation concerns, forecasting economic growth to slow and a jump in inflation this year as uncertainty over the impact of tariffs continues to loom large.

The Federal Open Market Committee, the FOMC, left itsbenchmark rate unchanged in a range of 4.25% to 4.5%.

Fed members continue see the benchmark rate falling to 3.9% this year, maintaining forecast for two rate cuts. For 2026, the Fed now expects fewer rate cuts, forecast rates to fall to 3.6% in 2026, up from a prior forecast of 3.4% in March. For 2027, the committee revised its policy rate outlook higher, seeing rates falling to 3.4%, up from 3.1% previously.

Fed chairman Jerome Powell, however, attempted to downplay the significance of the rate path outlook, saying at a press conference o Wednesday that “no one holds these...rate paths with a great deal of conviction, and everyone would agree that they’re all going to be data dependent.”

On a day when the Fed reiterated its expectation that its short-term interest rate target will be lowered twice this year, Powell said at a press conference following Fed’s policy meeting that “no one holds these...rate paths with a great deal of conviction, and everyone would agree that they’re all going to be data dependent.”

The less dovish path for rate cuts comes as Fed members are signaling worries about slowing growth and faster inflation, or stagflation, at a time when many expect the impact of President Donald Trump’s policy including tariffs as well as the clampdown in immigration in the second half of the year.

The core personal consumption expenditures price index, the Fed’s preferred inflation forecast, is forecast to be 3.1% in 2025, up from a prior forecast in March of 2.8%. For 2026, inflation is estimated to be 2.4%, up from 2.2% previously, and slowing further to the 2.1% target by 2027, up from 2% previously, suggesting that the Fed is bracing for stickier inflation ahead.

The labor market, which continued to show signs strength following a much better-than-expected June jobs report, released earlier this month, isn’t signalling any need for immediate easing even as the Fed members expect slightly less robust labor market.

The unemployment rate is expected to edge higher to 4.5% in 2025, up from a prior estimate of 4.4%, and remain steady at 4.4% in 2026, up from 4.3% previously. The uptick in unemployment is forecast continue to 2027, with members now expecting 4.4% unemployment in 2027, up from 4.3% previously.

The backdrop of sticker inflation and slightly less robust labor market will likely take its toll on the economy. Fed members see gross domestic product, or economic growth, falling sharply to 1.4% this year, down from a prior estimate of 1.7%. The economy is expected to bounce back less sharply than previously expected in 2026, with growth seen at 1.6%, down from a prior estimate of 1.8%.

This article first appeared in Investing.com