The Federal Reserve kept its benchmark interest rate steady at around 4.3% on Wednesday. The decision comes as the central bank faces economic uncertainty. In its quarterly economic projections, the Fed adjusted its expectations.
It now predicts slower economic growth this year and next compared to three months ago. The economy is forecast to grow just 1.7% in 2025, down from 2.8% last year. Growth in 2026 is projected at 1.8%.
Inflation is expected to rise slightly to 2.7% by the end of this year from its current 2.5% level. This remains above the Fed’s 2% target. Uncertainty around the economic outlook has increased,” the Fed stated after its two-day meeting.
Chair Jerome Powell noted the impact of tariffs on inflation during a news conference. He said these tariffs have begun to push up prices and may delay progress towards price stability. With the arrival of tariff inflation, further progress may be delayed,” Powell said.
However, he emphasized that the Fed still expects inflation to reach nearly 2% by the end of next year. The tariffs might result in a one-time price increase rather than an ongoing inflation crisis, he suggested.
fed’s cautious approach amid uncertainties
The S&P 500 stock index rose 1% in response to Wednesday’s developments. This shows investor approval of the Fed’s current trajectory. However, economic forecasts remain mixed.
Eight of the 19 Fed officials now foresee only one or no rate reductions this year. This is up from just four officials in December. Some analysts believe the Fed might maintain higher rates longer than previously expected if inflation remains a concern.
“The Fed really can’t know exactly what will happen, which is why they are prepared to be patient and see how the economy evolves,” explained Michael Gapen, an economist at Morgan Stanley. The Federal Reserve also announced a slower reduction of its Treasury holdings. These were significantly expanded during the pandemic.
The Fed will now only let $5 billion of Treasurys mature each month without reinvestment, down from $25 billion previously. This means the Fed will reinvest more of the expiring bonds into new securities. Looking ahead, the Fed faces dual concerns of persistent inflation and slower growth.
This creates a complex backdrop for monetary policy. “We’re not going to be in any hurry to move,” Powell concluded. “We’re well positioned to wait for further clarity and not in any hurry.”
The Fed’s cautious stance aims to balance the conflicting pressures of maintaining economic stability while managing inflation and growth expectations amidst uncertain conditions.
