Fed Holds Rates, Warns of Inflation and Slower Growth Amid Global Tensions

The U.S. Federal Reserve has decided to keep interest rates steady between 4.25% and 4.5%, maintaining its position since December 2024. Despite recent encouraging economic indicators, Fed Chair Jerome Powell warned that inflationary pressures may rise in the coming months, primarily due to tariffs. The central bank continues to forecast two rate cuts in 2025, but also adjusted its outlook, projecting higher inflation at over 3% and a slowdown in GDP growth to 1.4% this year. This combination raises the specter of stagflation—where prices increase even as economic growth slows.

At a press conference, Powell addressed growing concerns over the delayed impact of tariffs on consumers. While recent data—including a modest 0.1% CPI rise in May and strong job growth—suggest resilience, Powell emphasized that inflationary effects from tariffs often take time to filter through the economy. Goods on sale today may have been imported months before the latest tariffs, meaning consumers could start feeling the full brunt in the near future. He acknowledged that while the U.S. economy shows no signs of imminent weakness, a deceleration is expected.

Market reactions were muted. U.S. equities remained largely flat on Wednesday, with minor movements across major indices. The S&P 500 slipped slightly, the Dow edged down 0.1%, and the Nasdaq rose marginally by 0.13%. In contrast, Asia-Pacific markets reacted more negatively on Thursday, led by Hong Kong’s Hang Seng Index falling nearly 2%. In Japan, Nippon Steel stock jumped after its acquisition of U.S. Steel, bucking the regional trend.

Geopolitical developments added to the cautious mood. Israeli President Isaac Herzog said regime change in Iran is “not an official objective,” focusing instead on halting Tehran’s nuclear ambitions. Meanwhile, President Trump, amid escalating Israel-Iran tensions, confirmed he hadn’t decided on whether to order a U.S. strike on Iran. The U.S. is preparing evacuation plans for citizens in Israel, further highlighting the seriousness of the situation.

On the diplomatic front, tensions arose between the U.S. and India. Indian Prime Minister Narendra Modi rejected President Trump’s claims of mediating a ceasefire with Pakistan. Modi’s office emphasized India’s consistent position against third-party mediation in South Asian affairs. This disagreement also underscores how foreign policy narratives can diverge significantly between global leaders, potentially complicating bilateral relations moving forward.

Source: CNBC