By Howard Schneider
WASHINGTON (Reuters) -The Federal Reserve is expected to keep interest rates unchanged on Wednesday as its policymakers assess signs of a cooling economy and the risk of higher inflation from U.S. import tariffs and the escalating crisis in the Middle East.
Since setting its benchmark interest rate in the current 4.25%-4.50% range in December, the Fed has watched the economic outlook grow cloudier, particularly after President Donald Trump returned to power in January and quickly overhauled U.S. trade policy by announcing sharply higher levies on imported goods.
While many of the tariffs have been delayed, the issue is unresolved and on the radar of U.S. central bank officials.
Oil prices also have risen after Israel’s attack last week on Iran, and subsequent missile exchanges by the two regional foes, while data on the job market, retail sales, and other aspects of the U.S. economy suggests growth may be weakening.
Fed officials have said they want clarity on the economy’s path towards either higher inflation or weaker growth before giving much new guidance on interest rates, but so far the prospect of both rising prices and slowing employment remains a possibility.
A National Association for Business Economics survey released on Monday showed economists expect 2025 GDP growth to ebb to 1.3%, down from the 1.9% projected in early April, with inflation ending the year at 3.1%, a percentage point higher than the reading in April and well above the Fed’s 2% target.
Respondents said the unemployment rate, which was 4.2% in May, would end this year at 4.3% before beginning a steady rise to 4.7% in early 2026.
‘PARALYZED BY TRUMP’S UNCERTAINTY’
With risks to both the Fed’s inflation and employment goals and the unresolved questions around Trump’s policy plans, investors expect the central bank to be anchored where it is for perhaps months to come, with no further rate cuts until September. Trump has demanded an immediate reduction in borrowing costs.
The U.S. central bank cut rates three times in 2024.
“The Fed’s revealed preference is to be paralyzed by Trump’s uncertainty. Central bankers are always a conservative bunch, and with risks to both sides of their mandate, the bias is to wait and see if the next few months will resolve their dilemma. Meanwhile, the president ain’t happy,” Dario Perkins, an economist at TS Lombard, wrote in an analysis of where the Fed stands in relation to the current economic data and what Trump wants the central bank to do.
The Fed will release its policy statement alongside policymakers’ updated economic and interest rate projections at 2 p.m. EDT (1800 GMT) on Wednesday following the end of its latest two-day meeting. Fed Chair Jerome Powell will hold a press conference half an hour later.
Michael Feroli, chief U.S. economist at JP Morgan, said he did not expect any substantive changes in the policy statement, with recent job growth still solid, inflation remaining above the Fed’s target, and uncertainty elevated.
Policymakers’ projections, however, will provide an updated sense of how they expect the economy to evolve in coming months, and how monetary policy may need to respond. The last round of projections in March showed they expected the Fed to deliver two quarter-percentage-point rate cuts by the end of 2025, a view that matches current market pricing.
(Reporting by Howard Schneider; Editing by Paul Simao)
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