Federal Reserve officials expect inflation to worsen in the coming months, but they still foresee two interest rate cuts by the end of this year, the same as they projected in March.
The Fed kept its key rate unchanged for the fourth straight meeting Wednesday, and said the economy is expanding at “a solid pace." Changes to the Fed's rate typically — though not always — influence borrowing costs for mortgages, auto loans, credit cards, and business loans.
The central bank also released its latest quarterly projections for the economy and interest rates. It expects noticeably weaker growth, higher inflation, and slightly higher unemployment by the end of this year than it had forecast in March, before President Donald Trump announced sweeping tariffs April 2. Most of those duties were then postponed April 9. The Fed also signaled it would cut rates just once in 2026, down from two cuts projected in March.
RELATED STORY | How higher interest rates can earn you money
Fed officials see inflation, according to its preferred measure, rising to 3% by the end of this year, from 2.1% in April. It also projects the unemployment rate will rise to 4.5%, from 4.2% currently. Growth is expected to slow to just 1.4% this year, down from 2.5% last year.
Despite the gloomier outlook, Fed chair Jerome Powell and other officials have underscored that they are holding off from any changes to their key rate because of the uncertainty surrounding the impact of the tariffs and economic outlook. Many of the Fed's policymakers have expressed particular concern that the duties could boost prices, creating another surge of inflation just a couple of years after the worst inflation spike in four decades.
