Fed maintains rates at 4.25%–4.5%, citing weaker growth and elevated inflation risks

The Federal Reserve said yesterday that it has decided to maintain the target rate for its federal funds rate, which comes from the Federal Reserve Federal Open Market Committee (FOMC) at 4.25%-to-4.5%.

As has been the case in previous months, this was the expected outcome, marking the fifth time in 2025 that rates have remained unchanged. Which was preceded by three consecutive rate cuts in 2024, including: a reduction to 4.75%-to-4.5% in September; a reduction from 4.50%-to-4.75% in November; and a reduction to 4.25%-to-4.50% in December.

Nine of the Federal Reserve board members voted to keep rates at current levels, with two other board members voted to lower the rate by 0.25%.

While concerns regarding the economy, driven in large part by ongoing tariffs and trade policy, which many industry stakeholders view as increasing supply chain uncertainty on myriad levels, bringing inflation down remains a key objective for the Federal Reserve, at a time when much remains in flux, for various reasons.

The Fed explained that while swings in net exports continue to affect the data, recent indicators suggest that growth of economic activity moderated in the first half of the year, with the unemployment rate remaining low, coupled with solid labor market conditions, while noting that inflation remains somewhat elevated.

“The [FOMC] seeks to achieve maximum employment and inflation at the rate of 2% over the longer run,” said the Fed. “Uncertainty about the economic outlook remains elevated. The Committee is attentive to the risks to both sides of its dual mandate.”

Going forward, the Fed stated that as it assesses the appropriate stance of monetary policy, it will continue to “monitor the implications of incoming information for the economic outlook, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

In comments made at a press conference yesterday, Federal Reserve Chairman Jay Powell explained that the Fed believes the current stance of monetary policy leaves it well positioned to respond in a timely way to potential economic developments.

“Recent indicators suggest that growth of economic activity has moderated,” said Powell. “GDP rose at a 1.2 percent pace in the first half of the year, down from 2.5 percent last year.  Although the increase in the second quarter was stronger at 3 percent, focusing on the first half of the year helps smooth through the volatility in the quarterly figures related to the unusual swings in net exports.  The moderation in growth largely reflects a slowdown in consumer spending.  In contrast, business investment in equipment and intangibles picked up from last year’s pace.  Activity in the housing sector remains weak.”  

Addressing inflation, Powell observed that while it has eased significantly from the mid-2022 highs, it still remains elevated relative to the Fed’s 2% goal, adding that estimates based on the Consumer Price Index and other data indicate that total PCE prices increased 2.5% over the 12-month period through June, and when excluding the volatile food and energy categories, core PCE price were up 2.7%.

“These readings are little changed from the beginning of the year, although the underlying composition of price changes has shifted: services inflation has continued to ease, while increased tariffs are pushing up prices in some categories of goods,” he said. “Near-term measures of inflation expectations have moved up, on balance, over the course of this year on news about tariffs, as reflected in both market-based and survey-based measures.  Beyond the next year or so, however, most measures of longer-term expectations remain consistent with our 2 percent inflation goal.”   

Keith Prather, Armada Corporate Intelligence Managing Director, recently told LM that the Fed only forecasted two quarter point cuts this year and perhaps one next year and one in 2027.

“That's pretty dismal and signals throttling by the Fed,” he said. “Unemployment is expected to inch up to 4.5% (which is reasonable when we think about AI job replacement trends) but inflation goes to 3%. Since he has a dismal growth forecast, inflation is not likely being driven by growth, the Fed believes its tariffs and perhaps some oil shock risk in the mix. The Fed's estimate on the economy is much weaker than the administration's (and even some other private estimates). It's a bit of a head scratcher when you look at the details in the report.” 

As previously reported, a recently-conducted Logistics Management reader survey of more than 100 freight transportation, logistics, and supply chain stakeholders found that 63% of respondents felt a rate cut would help, with 37% saying it would not.

Reasons cited for the former included: access to cheaper capital helping the sector and various businesses; reducing interest payments and improving cash flow; spurring housing sector growth; and improving consumer demand, among others. And reasons for the latter included: labor issues not subject to interest rates and deflation, among others.

If there are declines in inflation in the coming months, which is far from a certainty, it could create a situation in which the Federal Reserve begins to feel like it can continue with rate cuts. Should the unemployment rate see further improvement and a trade deal, specifically between the U.S. and China, were to be made, it could potentially lead to a series of 0.25% rate cuts. But, to be clear, that is not where things stand, at the moment.