In a closely watched decision on Wednesday, the Federal Reserve chose to keep interest rates unchanged while signaling a more cautious view of the US economy, hinting at the potential for rate cuts later in the year.
The Federal Open Market Committee (FOMC) voted 9-2 to maintain the benchmark federal funds rate within the 4.25% to 4.5% range, marking yet another meeting this year without a change to borrowing costs.
The decision comes as officials acknowledged a moderation in economic activity in the first half of 2025, a notable shift from their previous characterization of growth as occurring “at a solid pace.”
Fed acknowledges slower growth
In its post-meeting statement, the Fed observed that “recent indicators suggest that growth of economic activity moderated,” citing continued volatility in net exports.
This downgrade in outlook replaces the committee’s earlier view of a solidly expanding economy.
The revised language reflects growing concerns among policymakers about headwinds facing the economy, despite GDP figures showing a 3% annualized increase in the second quarter.
Consumer spending, a key driver of economic growth, advanced at its slowest pace over two consecutive quarters since the COVID-19 pandemic began.
This weakening trend, coupled with ongoing trade tensions and the effects of tariffs imposed by the Trump administration, appears to be influencing the Fed’s more cautious tone.
Officials also emphasized that inflation remains “somewhat elevated,” even as consumer price data for June came in below expectations for the fifth consecutive month.
Prices for tariff-exposed goods such as apparel, electronics, and toys saw noticeable increases.
Meanwhile, the labor market was described as “solid,” though some signs of softening have begun to emerge.
Historic dissent highlights division
The vote was notable for the rare dissent of two Federal Reserve governors, Christopher Waller and Michelle Bowman, both of whom supported a quarter-point cut rather than holding rates steady.
Their dissents mark the first time since 1993 that two governors have opposed a committee decision.
Waller also previously dissented in March over the pace of balance-sheet reduction, while Bowman favored a more modest rate cut in September of last year.
Waller expressed concerns over weakening private-sector payrolls, while both dissidents may be reflecting broader sentiment shifts within the central bank.
According to the Fed’s June projections, several officials were already anticipating two to three rate cuts before year-end.
The split suggests that the Fed may be approaching an inflection point, particularly as inflation shows signs of easing and the labor market absorbs the effects of immigration restrictions.
Markets watch September for potential shift
Despite the internal divisions and the shift in language, markets had not expected a rate cut at this meeting.
However, futures markets are now pricing in a roughly 60% chance of a cut at the Fed’s next policy meeting in September.
President Donald Trump, who has repeatedly pressured the central bank to lower rates, reiterated his criticism just before the announcement and predicted that cuts would come in September.
Governor Adriana Kugler did not attend the meeting due to a personal matter, said a Fed spokesperson.
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