The Federal Reserve held interest rates steady Wednesday for the second meeting in a row and maintained a prior prediction for two rate cuts at some point this year.
What the central bank did change, however, was its outlook on inflation and economic growth amid uncertainties stemming from some of President Trump’s economic policies.
Fed officials now see inflation staying higher this year than previously estimated and economic growth going lower than prior predictions.
Policymakers estimate that the core Personal Consumption Expenditures (PCE) measure of inflation will be 2.8% at the end of 2025, compared with 2.5% previously.
And the US economy is now projected to grow at an annualized pace of 1.7% instead of 2.1%. The unemployment rate is seen edging up to 4.4% from 4.3% previously.
“Uncertainty around the economic outlook has increased,” Fed officials said in their policy statement.
The adjustments are the first from policymakers during the new Trump administration, just as the new president’s economic policies are being put into place.
The signature move from the White House since Jan. 20 has been the imposition of tariffs on China, Canada, and Mexico, as well as on steel and aluminum. Trump promises to announce a new slate of “reciprocal” duties on many more countries early next month.
Fed Chair Jay Powell has also consistently stressed a wait-and-see approach to assessing the economic impact of policy changes.
As a result, the Fed has now held borrowing costs steady for two consecutive meetings, maintaining its benchmark interest rate in the range of 4.25%-4.5%. The pause follows three consecutive rate cuts in late 2024.
The central bank also announced it will begin slowing the pace of Treasuries being drawn off its balance sheet starting in April, reducing the amount of Treasuries allowed to roll off from $25 billion to $5 billion. The Fed, however, will maintain the pace of mortgage-backed securities being drawn down by $35 billion per month.
Fed governor Chris Waller dissented in Wednesday decision because he would have preferred to continue the current pace of decline in letting bonds mature off the Fed’s balance sheet. He agreed with the decision to hold rates steady.
Waller and his Fed colleagues on Wednesday kept their median estimate first made in December for two rate cuts in 2025, even as a much-studied “dot plot” showed a large number of policymakers favored fewer or no cuts.
Nine officials see 2 cuts, while 4 officials see 1 cut and 4 see no cuts.
The biggest challenge for the Fed going forward may be how to balance both sides of their mandate — maximum employment and price stabilities — as uncertainties mount about both of those goals.
One large concern for investors is the possibility of a scenario in which growth stalls, inflation persists, and unemployment rises — a dynamic known as stagflation.
Fed officials, though, offered some moderating words about the economy, too. They retained language in their Wednesday statement noting that “economic activity has continued to expand at a solid pace.”
On the inflation front, the next reading of the Fed’s preferred inflation gauge of core PCE could reveal some new complications.
The metric is likely to show the gauge remained elevated in February, rising to 2.7% from 2.6% seen in January, when it is released next week.
That is still far from the Fed’s eventual goal of 2%.
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