Stagflation warning as Fed resists Trump's pressure and holds interest rates

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By JOHN-PAUL FORD ROJAS

Updated: 18:00 EDT, 18 June 2025

America’s central bank last night resisted intense pressure from Donald Trump to slash interest rates as it warned of growing stagflation risks.

The US Federal Reserve left rates at a range of 4.25-4.5 per cent as it cut its forecasts for economic growth and raised the inflation outlook.

It came hours after Trump vented his fury at the Fed for not cutting benchmark borrowing costs and saying they should already be two percentage points lower.

The Fed is tasked with getting inflation down to its 2 per cent target – a job complicated by the US president’s imposition of steep tariffs on trading partners, many of which have been subject to a 90-day pause which is now coming to an end.

Fed chair Jay Powell said: ‘Increases in tariffs this year are likely to push up prices and weigh on economic activity.’

He said the effects may either prove ‘short-lived’ or more persistent. But he warned that the Fed could find itself in the ‘challenging scenario’ in which economic weakness puts pressure on it to cut rates while higher inflation pulls it in the opposite direction.

A major impact from tariffs has yet to be reflected by inflation figures, though Powell said more is expected in coming months as companies pass on the costs to consumers.

US jobs growth has been slowing – though not by as much as some feared. A further complication is the conflict between Israel and Iran, which has driven oil prices higher.

The Fed’s projections cut the outlook for US growth this year from 1.7 per cent to 1.4 per cent, and pencilled in unemployment of 4.5 per cent by the end of 2025, up from 4.2 per cent now.

It pointed to inflation finishing the year at 3 per cent. The forecasts imply an increasingly stagflationary outlook – the dismal scenario in which economic growth stagnates while at the same time inflation climbs.

The Fed still expects two quarter-point interest rate cuts this year, but slowed the pace from three to one each in 2026 and 2027. 

That would cause huge frustration to Trump, who yesterday even mused about taking over at the Fed himself.

‘Am I allowed to appoint myself at the Fed? I’d do a much better job,’ he said.

‘I call him “too late Powell” because he’s always too late. I mean, if you look at him, every time I did this I was right 100 per cent, he was wrong.’

The Fed announcement came ahead of today’s Bank of England rates decision.

UK rate-setters look set to leave rates on hold at 4.25 per cent as the Bank adopts a ‘wait and see’ approach to the impact of Trump’s trade war.

House prices plummet 

House prices fell at the sharpest pace in nearly four years in April after Britain’s stamp duty holiday ended.

Average prices dropped by 2.8 per cent between March and April, official figures showed, the biggest drop since July 2021, bringing the average UK price down to £265,000.

Prices were still up 3.5 per cent on the year before, but that was sharply down from the 7 per cent annual growth in March.

It came after the end of a tax break which had meant first-time buyers were paying no stamp duty on properties worth up to £425,000. 

The threshold reverted to £300,000 at the start of April.

A rush to beat the deadline drove a burst of housing market activity in March.

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