The Federal Reserve left its benchmark interest rate unchanged on Wednesday, with Chair Jerome Powell signalling that policymakers remain vigilant over persistent inflation and elevated economic uncertainty, even as the United States’ (US) labour market stays robust.

The Federal Open Market Committee (FOMC) kept the target range for the federal funds rate at 4.25 per cent to 4.5 per cent, citing a “solid” economic backdrop and a labour market that is “at or near maximum employment”. Powell told reporters that the central bank’s current policy stance positions it “well to respond in a timely way to potential economic developments”.

US economic growth slowed in the first quarter, with GDP edging down due to businesses importing goods ahead of potential tariffs, which complicated growth measurement. However, private domestic final purchases — a key gauge of underlying demand — expanded at a 2.5 per cent annual rate, buoyed by a rebound in business investment even as consumer spending moderated. Powell noted that surveys of households and businesses reflect declining sentiment and elevated uncertainty, partly due to trade policy concerns, though the full impact on future spending remains unclear.

Payrolls grew by an average of 135,000 jobs per month over the past quarter, while the unemployment rate held at 4.2 per cent. Wage growth has moderated but continues to outpace inflation, and Powell said the labour market is “broadly balanced” and not a significant source of inflationary pressure.

Inflation, though well below its 2022 peak, remains above the Fed’s two per cent target. The personal consumption expenditures (PCE) price index rose 2.3 per cent in the 12 months to May, with core PCE up 2.6 per cent. Powell noted that near-term inflation expectations have ticked higher, largely due to tariff concerns, but longer-term expectations remain anchored to the Fed’s goal.

“Recent increases in tariffs are likely to push up prices and weigh on economic activity,” Powell said, warning that the inflationary impact could range from a short-lived price-level shift to more persistent effects, depending on how long tariffs remain in place and whether inflation expectations stay anchored.

The Fed’s latest projections show the median policymaker expects the federal funds rate to end 2025 at 3.9 per cent, before gradually declining to 3.4 per cent by 2027. Policymakers also forecast GDP growth of 1.4 per cent this year and 1.6 per cent next year, both slightly slower than previously anticipated, reflecting heightened uncertainty.

Powell said the central bank is continuing its five-year review of its monetary policy framework, with updates to be finalised by late summer. He reiterated the Fed’s commitment to supporting maximum employment and returning inflation to its two per cent goal, emphasising that the central bank’s decisions are guided by their impact on American communities, families, and businesses.

“We at the Fed will do everything we can to achieve our maximum employment and price stability goals,” Powell said.