Washington, D.C. – July 31, 2025 – The Federal Reserve announced Wednesday that it will maintain its benchmark federal funds rate at 4.25% to 4.5%, a decision reflecting a robust U.S. economy tempered by uncertainties surrounding President Donald Trump’s tariff policies. The move, made at the Federal Open Market Committee (FOMC) meeting, marks the fifth consecutive meeting without a rate change, despite pressure from the Trump administration for cuts.

Economic Backdrop and Decision

The U.S. economy grew at a stronger-than-expected 3% annualized rate in the second quarter of 2025, surpassing the Dow Jones consensus estimate of 2.3%, driven by improved trade balances and resilient consumer spending. The Personal Consumption Expenditures (PCE) price index, the Fed’s preferred inflation gauge, rose 2.1% for the quarter, slightly above the 2% target, while core PCE, excluding food and energy, increased 2.5%, down from 3.5% in Q1. Despite this progress, inflation remains “somewhat elevated,” and the Fed noted that “uncertainty about the economic outlook has increased further” due to volatile trade policies.

Fed Chair Jerome Powell emphasized the economy’s resilience, stating, “The economy is still in solid shape,” with unemployment steady at 4.2% and job growth holding firm. However, two Trump-appointed Fed board members dissented, advocating for rate cuts—the first such split in over three decades, signaling political pressure and economic uncertainty. Powell acknowledged the challenge of balancing the Fed’s dual mandate of maximum employment and stable prices, noting that tariffs could push inflation higher while slowing growth, risking a stagflation scenario.

Tariff Concerns and Economic Projections

Trump’s tariffs, including a 10% baseline on most imports and higher rates on specific countries like China (30%) and Brazil (50%), are projected to raise consumer prices, with estimates suggesting an additional 0.5 to 1 percentage point on core PCE inflation by 2026. The tariffs, affecting $2.3 trillion of U.S. goods imports (71% of total imports), are expected to generate $167.7 billion in revenue in 2025 but could reduce GDP by 0.8% if sustained. The Fed lowered its 2025 GDP growth forecast to 1.4% from 1.7% and raised core PCE inflation projections to 3.1% from 2.8%, reflecting tariff-related pressures.

Powell cautioned that “the scope, scale, and persistence of [tariff] effects are very uncertain,” citing the administration’s erratic rollout, with tariffs imposed and paused unpredictably. For instance, a 25% tariff on Canada and Mexico was delayed for 30 days, while a trade deal with Japan set tariffs at 15% instead of 25%. These fluctuations have fueled market volatility, with business surveys reporting heightened anxiety over supply chains and pricing.

Policy Outlook and Market Reaction

The FOMC projects two 25-basis-point rate cuts in 2025, likely starting in September or October, though some economists predict delays until December if tariff-driven inflation persists. Markets expect no immediate cuts, with a less than 30% probability of a move in September, reflecting caution over tariff impacts. The Fed also announced plans to slow its balance sheet reduction in April, lowering the monthly cap on U.S. Treasuries redemption to $5 billion from $25 billion, a move that boosted stock markets by easing liquidity concerns.

Trump intensified calls for rate cuts, posting on Truth Social, “2Q GDP JUST OUT: 3%, WAY BETTER THAN EXPECTED! ‘Too Late’ MUST NOW LOWER THE RATE.” However, Powell reiterated the Fed’s data-driven approach, stating, “We have made no decisions about September,” and emphasized waiting for clearer tariff impacts. Critics, including some Wall Street analysts, argue the Fed risks waiting too long, potentially exacerbating economic slowdown if tariffs trigger a broader trade war.

Looking Ahead

As the Trump administration’s August 1 tariff deadline approaches, the Fed remains in a “wait-and-see” mode, balancing strong economic indicators against the risk of tariff-induced inflation and slower growth. With global trade partners like the EU and China threatening retaliatory tariffs, the economic outlook remains uncertain. The Fed’s next meeting in September will be critical, with two additional rounds of employment and inflation data expected to shape its decision on rate cuts. For now, the central bank is navigating a delicate path, aiming to maintain stability amid a rapidly evolving trade landscape.

For more details on Federal Reserve policies, visit https://www.federalreserve.gov.