The Federal Reserve, as widely anticipated, held interest rates steady on Wednesday. However, the US central bank hinted that borrowing costs could drop by half a percentage point before the end of this year, reflecting concerns over slowing economic growth and an eventual decline in inflation.
In a notable shift, Fed officials adjusted their inflation outlook for 2025, predicting a rise in prices. They now expect their preferred inflation gauge to close the year at 2.7 per cent, slightly higher than the 2.5 per cent forecast made in December. The Fed’s long-standing target for inflation remains at 2 per cent.
On the economic front, the central bank revised its growth forecast downward, projecting a slowdown from 2.1 per cent to 1.7 per cent this year. Additionally, unemployment is anticipated to edge slightly higher by year-end.
The Fed’s statement acknowledged rising risks and an unclear economic outlook. “Uncertainty around the outlook has increased,” the policymakers noted, reflecting the first few weeks of the Trump administration and the unfolding tariff policies that could reshape global trade. Despite the uncertainty, the Fed kept its policy rate unchanged within the 4.25 per cent to 4.50 per cent range.
In a separate decision, the central bank revealed plans to slow the pace of reducing its balance sheet, a process known as quantitative tightening. This decision sparked a dissent from Fed Governor Chris Waller, who disagreed with the change in balance sheet policy.
While financial markets had already anticipated the Fed’s actions, the updated projections suggest that economic conditions may remain challenging. Slowing inflation offers room for potential rate cuts, but it may not be a smooth path ahead.
Although the statement did not directly reference President Donald Trump’s tariff policies, the inflation projections align with the introduction of tariffs on imported goods. The Fed appears to view the initial inflationary impact of the tariffs as temporary rather than a long-term driver of price increases.
Looking further ahead, the Fed’s projections suggest inflation will stabilise at 2 per cent by the end of 2027. Meanwhile, interest rates are expected to settle at 3.1 per cent by the end of that year, a level seen as neutral for the economy, neither encouraging nor discouraging growth.
After cutting interest rates by a full percentage point last year, the Fed has held rates steady since December, waiting for more definitive signs that inflation is on a sustained downward path. The impact of Trump’s economic policies, including tariffs and immigration enforcement, has added another layer of uncertainty.
In contrast to Trump’s promises of a forthcoming “golden age” for the US economy, the Fed’s outlook remains cautious. Economic growth is forecast to reach just 1.7 per cent this year and 1.8 per cent in both 2026 and 2027. Unemployment is projected to hover around 4.4 per cent this year, slightly higher than recent years, and only marginally improving to 4.3 per cent in 2026 and 2027. This figure is also above the 4.1 per cent unemployment rate recorded in February.
Fed Chair Jerome Powell is expected to address the latest policy decisions and economic projections in a press conference scheduled for 2:30 p.m. EDT. His remarks may provide further insights into the Fed’s strategy for managing the evolving economic landscape.
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