Fed Holds Rates Steady as Inflation Persists, Gold Climbs Higher
Yesterday the Federal Open Market Committee (FOMC) announced its decision to hold the federal funds rate steady within a target range of 4-1/4 to 4-1/2 percent, signaling caution as inflation remains persistently high and economic uncertainty lingers. Fed Chair Jerome Powell maintained an optimistic stance, asserting the economy remains in a “solid position,” despite continued volatility in trade policies and net exports. However, investors greeted the news by pushing gold prices to a fresh high of $3,397 an ounce on Wednesday, reflecting market skepticism around the Fed’s cautious optimism and the ongoing worries about maintaining purchasing power.
Powell mentioned that the unemployment rate is currently at 4.2 percent, near levels signaling “maximum employment,” with payroll job gains averaging approximately 135,000 per month over the last three months. Still, GDP shrank slightly in the first quarter of 2025, largely attributed to businesses front-loading imports in anticipation of looming tariffs. This contraction contributes to doubts regarding the Fed’s balancing act: keeping inflation in check without stalling economic growth.
The latest FOMC Summary of Economic Projections paints a lukewarm growth outlook, forecasting GDP expansion at 1.4 percent for 2025 and a modest improvement to 1.6 percent in 2026—figures weaker than earlier projections released in March. Inflation, meanwhile, continues to inch above the central bank’s targeted 2 percent, with total PCE inflation reaching 2.3 percent over the past 12 months and core PCE at a concerning 2.6 percent as of May. The SEP projects inflation to average 3 percent through 2025, only gradually receding to 2.4 percent in 2026 and 2.1 percent by 2027.
Compounding the uncertainty, the Fed emphasized ongoing risks related to trade, fiscal matters, immigration, and regulatory policies. Powell specifically cited the potential “one-time inflationary effects” from tariff impositions, underscoring the necessity of anchoring long-term inflation expectations firmly. “Keeping longer-term inflation expectations well anchored is crucial,” Powell reiterated, tacitly recognizing that short-term policy measures could fall victim to unpredictable government interventions.
To address inflationary pressures, the committee remains committed to shrinking its balance sheet by maintaining its strategy of rolling over Treasury securities principal payments and carefully reinvesting agency debt payments beyond set monthly limits. Meanwhile, all voting members—including Jerome Powell, John Williams, Susan Collins, and others—unanimously agreed to maintain the interest rate paid on reserve balances at 4.4 percent, effective June 20.
Market reaction to the Fed’s announcement was swift, as investors flocked to precious metals as a hedge against inflation, the possibility of war with Iran, and other economic uncertainty, propelling gold prices sharply upward. These market moves reflect broader skepticism about policymakers’ capacity to navigate inflationary pressures caused by factors outside the Fed’s direct control. Investors are betting on a 90.7% chance of the Fed holding rates again in July, but only time will tell if Powell can pilot the economy of choppy economic waters.
