Markets steady as Fed signals patient rate approach

June 25, 2025

The US Federal Reserve has opted to keep interest rates unchanged, a move that was widely anticipated by market participants. Morningstar Wealth recently delved into the topic.

In a notable shift, the Fed removed language from its previous statement that had warned of rising risks to both unemployment and inflation. This reversal follows a recent easing of concern around trade tariffs, as several planned implementations have been delayed and negotiations between trading partners have gained traction. Despite this, the Fed still described the economic outlook as “elevated” in uncertainty, though slightly improved compared to May, the article said.

The Fed maintained its view that labour market conditions remain strong, even as inflation continues to exceed the 2% target. Policymakers face a dilemma: easing rates to stimulate economic growth could fuel further inflation, while leaving rates unchanged may constrain economic activity. Economic data in recent weeks has been largely in line with forecasts, offering little urgency for immediate action.

The statement also reiterated that recent volatility in trade flows, particularly a spike in imports, had distorted economic data. This contributed significantly to the Q1 GDP contraction, as businesses rushed to bring in goods ahead of potential tariff hikes. A clearer picture of the underlying economic strength will likely emerge only after further data becomes available in the coming months.

Federal Reserve chair Jerome Powell continues to emphasise a data-dependent approach, noting that erratic patterns in consumer and business activity, driven by trade policy uncertainty, have muddied the economic waters. It may take several months for these distortions to normalise. Meanwhile, political pressure on the Fed persists, with President Trump continuing to call for immediate rate cuts.

While today’s outcome met expectations, the coming months are likely to test the Fed’s resolve. Balancing inflation, employment, and global uncertainty will require a delicate and patient approach.

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