Key Points

  • Federal Reserve policymakers on Wednesday held their benchmark interest rate steady in a range of 4.25% to 4.5%, citing "elevated inflation," and overruled a rare dissent from two officials who had sought a quarter-point cut.
  • The decision reflects that Fed officials are reluctant to lower borrowing costs until they are confident that the highest tariffs since the 1930s will not reignite inflation, which remains above the central bank's 2% target. Governors Michelle Bowman and Christopher Waller, who voted against the decision, had supported easing policy earlier this month in speeches, citing signs of weakness in the labor market.
  • Fed Chair Jerome Powell disagreed with his two colleagues. "Labor market conditions remain solid," he said at a press conference after the meeting, while inflation is "still somewhat elevated relative to our 2% longer-run goal." He added, "The economy is not performing as if restrictive policy is dragging on it."Powell disagrees with his two colleagues。

In-Depth Analysis

A cooling labor market alongside stubborn, above-target inflation presents a dilemma for the central bank, which Congress has tasked with the dual mandate of ensuring price stability and maximum employment.

Powell and most of his colleagues have supported a wait-and-see approach before lowering the benchmark rate this year, warning that high import tariffs could cause a sustained rather than temporary jump in prices.

However, in the view of Waller and Bowman, such patience ignores signs of a weakening labor market and could lead to an unnecessary rise in unemployment.

Data released Tuesday by the U.S. Labor Department showed thatjob openings fell in June compared with May, and the hiring rate fell to 3.3%, one of the lowest levels since 2013.

Additionally, the Conference Board said Tuesday that the share of consumers this month who saidjobs are hard to findrose to 18.9% from 14.5% in January.

But Powell views the labor market as healthy.

"By many, many statistics, the labor market is still in some sort of balance," he said.

"Things like the quits rate, job openings, not to mention the unemployment rate, are very similar by many measures to a year ago," he said. "So you don't see the labor market weakening."

Powell said the unemployment rate has remained near its current level of 4.1% for months, and the labor market has come into balance as both labor supply and demand have declined.

"But the fact that the market is coming into balance because both supply and demand are coming down suggests downside risks," he said. "So we're certainly watching that closely."

Weak economic growth could signal risks in delaying rate cuts.

Preliminary data released Wednesday by the Commerce Department's Bureau of Economic Analysis showed thatgross domestic product contracted at an annualized rate of 0.5% in the first quarter and grew 3% in the second quarter。

Import tariffs imposed during the Trump administration distorted both GDP figures—a surge in imports in the first quarter to front-run tariffs and a decline in the second quarter offset each other.

The result: GDP grew at an annualized rate of 1.2% in the first six months of the year, less than half the 2.8% pace for all of 2024.

Meanwhile, Powell said price pressures support continuing with slightly restrictive monetary policy.

Data from the U.S. Bureau of Labor Statistics showed thatthe consumer price index rose 2.7% year over year in June, up from 2.4% in the prior month.

"We want inflation to get back to 2% fully," Powell said, adding that policymakers aim to ensure tariffs do not cause more than a one-time price shock.

"But we want to do that efficiently," he said.

"If you move too early, inflation doesn't get fully resolved, and you have to come back and raise rates again," Powell said. "If you move too late, you could cause unnecessary damage to the labor market."

Editor's note: This article has been updated with remarks from Federal Reserve Chair Jerome Powell's press conference.