US Fed keeps interest rate unchanged despite potential stagflation

The United States Federal Reserve opted for a dovish stance on Wednesday, keeping the interest rate unchanged despite seeing slower growth and slightly higher inflation in months to come. However, the Fed has signalled that policymakers foresee cutting borrowing costs by half a percentage point by the end of the year.

Dollar Pares Gains vs Euro

The US dollar trimmed its gains against the euro after the decision.  In light of the Trump administration's tariff measures, Fed officials revised their inflation outlook upward. They now expect their preferred inflation gauge to reach 2.7% by the end of the year, compared to the 2.5% forecast in December. The Fed’s inflation target remains at 2%.

The euro was down 0.49% on the day, trading at $1.0889 after earlier dipping to $1.0860. Meanwhile, the dollar index, which measures the greenback against six major currencies, rose 0.35% to 103.65.

Markets Buoyed

The US stock indexes edged higher on Wednesday. The S&P 500 rose 0.5% in afternoon trading, with little movement following the Fed’s announcement. The Dow Jones Industrial Average climbed 146 points, or 0.4%, while the Nasdaq composite gained 0.7% at the time of writing. The relatively calm trading offered a break from recent weeks of sharp market volatility.

NVIDIA shares rose 2.8% after hosting an event that reassured investors about the company's roadmap and demand for artificial intelligence. Tesla rebounded 4.1% after consecutive losses but remains down 41.9% for the year amid concerns over CEO Elon Musk’s cost-cutting measures targeting government spending. Meanwhile, General Mills dropped 2.2% after reporting weaker-than-expected revenue and lowering its full-year forecasts, citing ongoing macroeconomic uncertainty.

ly, Japan’s Nikkei 225 dipped 0.2% after the Bank of Japan left interest rates unchanged. Japan also reported a trade surplus for February, with exports rising over 11% as companies rushed to beat U.S. tariffs. European and Asian markets showed mixed results.

In the bond market, the 10-year Treasury yield fell to 4.29% from 4.31% following the Fed’s decision. The central bank announced it would reduce the pace of its monthly Treasury reductions starting in April, lowering the cap from $25 billion to $5 billion.

Uncertainty over Trump Tariffs 

Uncertainty remains high, driven by US President Donald Trump’s push to reshape the economy. His policies, including a series of tariff announcements, have created concerns among economists that businesses and households may pull back on spending. Trump has emphasised bringing manufacturing jobs back to the U.S. and reducing the size of the federal workforce, but the resulting uncertainty has weighed on confidence.

Against this backdrop, the Fed opted to take a wait-and-see approach before making further adjustments to interest rates. While lower rates could stimulate economic growth, they risk fueling inflation, which is already a concern due to tariffs.

This combination of slowing growth and persistent inflation, as the Fed anticipates, raises fears of “stagflation,” a challenging scenario for central bankers to address effectively.