US Fed treads carefully, leaving markets anxious about tariff risks

A cautious Federal Reserve has put a damper on hopes for interest rate cuts, leaving investors on edge as they navigate a murky mix of geopolitical tensions, inflation risks, and looming growth drag from US President Donald Trump's tariffs.

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The Fed on Wednesday kept the benchmark interest rate unchanged, as expected. While policymakers reaffirmed that they expected some reduction in borrowing costs this year, they dialed back the anticipated pace of future cuts because of the potential for higher inflation amid uncertainty over the Trump administration’s proposed tariff plans.

“The calm that the Fed has should be comforting to investors, but it also on the other hand reflects the incredible uncertainty that we have over all the data that is rolling forward,” said Bob Savage, head markets strategist at BNY.

Investors on Wednesday clung to expectations for two quarter-point rate cuts this year, in line with the median expectation of rate-setting Fed officials. Rates futures traders were largely betting on a cut between September and October, and a second one in December.

The market remains on edge after the Fed slightly marked up the outlook for inflation this year. Fed officials revised inflation expectations to 3% this year from a previous forecast of 2.7%, June’s summary of economic projections by the Fed showed. Economic growth forecasts for 2025 were revised to 1.4% from a March forecast of 1.7%.