Fed Holds Benchmark Rate at 4.25-4.5% per Year
Powell: "Tariffs Drive Up Prices, Burden Economic Activity"
Growth Forecast Lowered, Inflation Outlook Raised
Concerns Over Stagflation Intensify
"Tariff increases drive up prices and place a burden on economic activity. We need to consider that a significant level of inflation could occur within the next few months."
On June 18 (local time), Jerome Powell, Chair of the US Federal Reserve (Fed), warned of the possibility of tariff-induced inflation in the coming months. He also reaffirmed the Fed's existing stance to maintain a cautious approach to monetary easing until the impact of tariffs on the economy becomes more evident.
At a press conference held immediately after the Federal Open Market Committee (FOMC) regular meeting that day, Powell stated, "Everyone I know expects prices to rise because of tariffs." He noted that the effects of tariffs have already begun to appear and predicted that they would be fully reflected in prices over the summer.
Powell explained, "The impact of tariff policy has started to show up in some areas and is expected to expand further over the next few months," adding, "Price increases due to tariffs have been confirmed in certain items, such as personal computers and audiovisual equipment." However, he also emphasized, "Everything about the scale, duration, and timing of the tariff effects is highly uncertain."
He reiterated his position to maintain the current interest rate level and monitor the situation until the impact of tariffs can be confirmed.
Powell said, "Before we adjust our policy, we are in a good position to wait for more information about the future course of the economy for the time being." He stated that, given the uncertainty surrounding the impact of tariffs on prices, it is more appropriate to maintain the current rate than to rush into a rate cut.
He assessed the current economic situation positively. "The economy is solid and the growth rate is favorable," he said. "The labor market is cooling very slowly but remains very healthy, and there is no situation that requires a rate cut," he evaluated.
The Fed announced that it had unanimously decided to keep the federal funds rate at 4.25-4.5% per annum. This marks the fourth consecutive rate freeze, following decisions in January, March, and May. The interest rate gap between Korea and the US remains at 2 percentage points at the upper bound.
Regarding the interest rate outlook, the Fed maintained the possibility of two rate cuts this year. In the new dot plot released that day, the median projection for the policy rate at the end of this year remained at 3.9%, the same as before. This suggests that there could be two 0.25 percentage point cuts from the current 4.25-4.5%. However, seven out of the 19 FOMC members argued for keeping rates unchanged this year, up from four in March. The median projections for the policy rate at the end of 2026 and 2027 were raised to 3.6% and 3.4%, respectively, up from 3.4% and 3.1% in March. This implies that there may be only one rate cut each in the next two years.
As shown by the adjustment in the outlook for rate cuts after next year, the Fed indicated in the Summary of Economic Projections (SEP) released this time that concerns about stagflation have increased further. The Fed lowered its US GDP growth forecast for this year from 1.7% to 1.4%. The 2026 forecast was also lowered by 0.2 percentage points to 1.6%, while the 2027 forecast was maintained at 1.8%.
The inflation outlook was also raised. Based on the core Personal Consumption Expenditures (PCE) price index, which the Fed prioritizes, this year's forecast was adjusted from 2.8% to 3.1%. The forecasts for 2026 and 2027 were also raised by 0.2 and 0.1 percentage points, respectively, to 2.4% and 2.1%. This reflects the Fed's view that policies such as President Donald Trump's tariff policy are likely to push up prices and slow growth.
The New York stock market closed mixed within a narrow range as Powell confirmed he would not rush to cut rates, as expected. On the New York Stock Exchange (NYSE), the Dow Jones Industrial Average fell by 0.11% from the previous session. The S&P 500 index, focused on large-cap stocks, dropped by 0.03%, while the tech-heavy Nasdaq index rose by 0.13% to close the session.
The market expects the Fed to resume rate cuts in September, with a total of two cuts within the year. According to CME FedWatch, the federal funds rate futures market reflected a 61.7% probability that the Fed will cut rates by 0.25 percentage points in September. The probability of at least two 0.25 percentage point cuts within the year is 69%.
However, some on Wall Street predict that the Fed may only cut rates once this year, given that concerns about stagflation have been reaffirmed and tariff-related uncertainty remains high. Seema Shah, global chief strategist at Principal Asset Management, said, "The economic outlook remains highly uncertain, making it likely that the Fed is not confident about the future." She predicted, "The Fed is expected to hold rates steady until the end of the fourth quarter and cut rates only once by 0.25 percentage points this year."
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