Credit Sesame explains how mixed economic signals are complicating Fed decisions and what that means for 2025 interest rates and consumer borrowing costs.
June’s Fed meeting came and went without any change in the Federal funds rate. The decision reflects a growing problem: the economic indicators the Fed relies on are increasingly pointing in opposite directions.
Slowing economic growth and rising unemployment typically call for lower rates, but renewed inflation concerns are pulling the other way. This tug-of-war is leaving 2025 interest rates in limbo.
The Fed expects economic signals to move further apart
After the Federal Open Market Committee met on June 17 and 18, it released updated projections showing greater conflict between key economic indicators.
On one side, the Fed lowered its expectations for GDP growth and raised its unemployment forecast. That indicates it expects the economy to weaken more than previously thought.
At the same time, it raised projections for inflation in 2025 and the two years that follow. That means it sees price pressures remaining higher than hoped.
The Fed tries to balance two main goals: encouraging employment and limiting inflation. Lower interest rates can support job growth, while higher rates are often used to control inflation. Because those two responses are at odds with each other, tension between the Fed’s goals is not new. But now that tension appears to be growing.
Interest rates remain unchanged
At the end of its June meeting, the Fed announced it was holding the Federal funds rate steady at a target range of 4.25% to 4.5%.
This decision disappointed some, including President Trump, who has repeatedly called for cuts. However, Fed Chair Jerome Powell does not act alone. The rate-setting committee voted unanimously to leave rates unchanged, reflecting broad agreement that the economic situation does not support a move right now.
As recently as September, the Fed expected to lower rates to 3.4% by the end of this year. Instead, its latest projection shows a year-end rate of 3.9%, which is half a percentage point higher. It has also raised its rate expectations for 2026 and 2027.
Inflation uncertainty continues to weigh heavily on rate decisions. The Fed is not raising rates at this point, but it does not believe conditions justify lowering them either.
Inflation concerns have not gone away
One reason the Fed is drawing criticism for holding off on rate cuts is that inflation has remained relatively calm in recent months. Inflation remained calm with modest monthly price increases through much of 2024.
However, the Fed bases its decisions on where the economy is going, not just where it is now. Tariffs that have been announced are not yet fully reflected in prices. There are delays between when tariffs take effect and when their impact reaches consumers. Retailers often have existing stock to sell through first.
On top of that, ongoing conflict in the Middle East creates the possibility of rising oil prices, which can drive up costs across many sectors.
The Fed also considers how inflation can build on itself. Higher import prices can lead to domestic price increases. Companies may raise prices due to rising input costs, and employees may push for higher wages in response. This feedback loop can create lasting inflation that is harder to reverse.
To provide some perspective, the current rate is lower than the historical average. Over the past 50 years, the Federal funds rate has averaged 4.69%. Today, it sits at 4.33%.
Since August of last year, the Fed has lowered rates by a full percentage point, from 5.33% to 4.33%. So while it has not made deep or frequent cuts in 2025, it has already moved rates below the long-term norm.
The criticism is not that the Fed has done nothing. It is that it has not gone as far as some would prefer.
Consumer interest rates often move independently
From a consumer perspective, the Fed’s decisions may not matter as much as headlines suggest. Even when the Fed does cut rates, the impact on what consumers actually pay can be small.
For example, between mid-2019 and early 2020, the Fed cut rates by 2.25%. During that same period, the average interest rate on credit card balances dropped by only 0.53%.
In the second half of last year, the Fed cut rates by 1.0%, but 30-year mortgage rates fell by just 0.01%.
That is because consumer rates do not track the Federal funds rate exactly. Both are influenced by broader market factors, including credit risk and inflation expectations.
As the economy slows, lenders tend to raise rates to account for higher risk, especially on unsecured debt like credit cards. For borrowers with lower credit scores, those increases can be even steeper. Credit conditions may tighten, making it more difficult or expensive for some consumers to access credit at all.
Meanwhile, long-term mortgage rates are often more sensitive to inflation expectations than to short-term interest rate moves.
Broader changes are needed for real consumer relief
The Fed’s projections suggest that concerns about inflation are growing while the economic outlook is weakening. That is a difficult environment for lowering interest rates.
To see meaningful improvement in borrowing costs, several things would need to happen. A stronger economy could reduce credit risk. A shift in trade policy or global tensions could ease inflation pressure.
Until those conditions change, the Fed may have limited ability to affect consumer borrowing costs. The bigger issue is not whether the Fed chooses to cut rates. It is whether the economy provides the conditions that allow those cuts to make a difference.
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Disclaimer: The article and information provided here are for informational purposes only and are not intended as a substitute for professional advice.
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