The Federal Reserve announced on Wednesday that it would maintain its benchmark interest rate at its current level. This decision comes despite anticipated inflation remaining persistently high. The Fed also indicated an expectation of implementing two rate cuts this year. Nonetheless, these cuts are set against a backdrop of a projected economic slowdown this year and the next, as revealed in a new set of quarterly economic projections. These projections envisage economic growth slowing to 1.7% in 2025 from last year’s 2.8%, and further to 1.8% in 2026. Furthermore, inflation is predicted to rise slightly to 2.7% by the year’s end from its current 2.5%, figures which surpass the central bank’s 2% target.
The Fed’s projection retains an expectation of two rate cuts, but economic analysts have pointed out indications of a potential extended pause in rate alterations. This may result in the continuation of existing borrowing conditions for mortgages, auto loans, and credit cards over the coming months. Of the Fed’s 19 officials, eight now foresee only one or no rate reductions this year, an increase from four in December.
Michael Gapen, a Morgan Stanley economist, remarked that it may prove challenging for the Fed to lower rates this year, as inflation rates appear stagnant. During a news conference, Fed Chair Jerome Powell attributed rising inflationary pressures to President Donald Trump’s tariffs, suggesting they could hinder progress in inflation reduction seen since its 2022 peak.
Powell expressed that the central bank was nearing price stability before the tariffs’ impact, noting that future progress could be delayed. Late Wednesday, Trump urged on his platform for the Fed to “cut rates” as tariffs begin influencing the economy. Powell remains optimistic about steering inflation back to near 2% by next year’s conclusion. He described potential price hikes due to tariffs as isolated events rather than a continuous inflationary threat, explaining that temporary price surges might not compel a rate hike.
Investor response to Powell’s comments was positive, as evidenced by a 1% rise in the S&P 500 index during Wednesday afternoon trading. Luke Tilley, Wilmington Trust’s chief economist, commented on the Fed’s changing rhetoric regarding tariffs, noting Powell’s reduced alarm relative to previous meetings. Powell conceded that the Fed initially underestimated the persistent nature of inflation post-pandemic, delaying their rate hikes. However, he acknowledged current economic conditions as “uncertain,” necessitating observation before further actions are taken.
The Fed’s projections also anticipate a rise in unemployment to 4.4% from the current 4.1% by year’s end. The forecasts highlight the Fed’s precarious position: battling inflation would typically prompt higher rates, but slower growth and rising unemployment might lead to cuts to encourage spending and invigorate the economy.
For a second consecutive meeting, the Fed opted to maintain interest rates around 4.3%, adopting a wait-and-see approach amid evaluating impacts from Trump administration policies. Economists predict that tariffs may temporarily drive inflation upwards. However, policies like deregulation could offset this by reducing costs.
Powell addressed increased concerns within economic sentiment surveys, though he maintained that the low unemployment rate and ongoing economic expansion provide a healthier outlook. Despite sharp sentiment declines, Powell stated actual economic activity remains strong. Powell emphasized the heightened uncertainty surrounding the economic forecast and expressed the Fed’s preparedness to proceed with patience.
The Fed announced it would decelerate the reduction of its Treasury holdings, amassed during the pandemic’s aftermath. Instead of allowing $25 billion in Treasurys to mature monthly without reinvestment, the Fed will now allow only $5 billion, effectively reinvesting more in new securities. This shift is aimed at keeping long-term Treasury interest rates lower and is characterized as a technical adjustment rather than a policy pivot.
Federal Reserve governor Christopher Waller opposed the decision to slow Treasury purchases. The Fed continues to allow $35 billion in mortgage-backed securities to mature monthly. Officials are closely monitoring Americans’ inflation expectations, after last week’s survey indicated a spike. Such expectations are crucial since they can influence behavior leading to actual inflation. Nevertheless, Powell described last week’s increase as an outlier, stating American consumers generally expect inflation to remain balanced.
Retailers report that consumers have become more cautious due to anticipated price increases from tariffs, a sentiment reflected by modest retail sales recovery and expectations of costlier homebuilding activities.