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In a closely watched decision on Wednesday, the United States Federal Reserve (Fed) maintained its benchmark interest rates, as widely expected, but indicated that rate reductions are likely later in the year.
Amid growing concerns over the impact of tariffs on an already slowing economy, the Federal Open Market Committee (FOMC) kept its key borrowing rate within the target range of 4.25%-4.5%, where it has remained since December. Markets had priced in virtually no chance of a change during this week’s two-day policy meeting.
In addition to its rate decision, the Fed updated its economic and rate projections through 2027 and adjusted the pace at which it is reducing its bond holdings.
Despite the uncertain effects of President Donald Trump’s tariffs and his ambitious fiscal policies, including tax cuts and deregulation, officials still anticipate a half-percentage-point reduction in rates by the end of 2025. As the Fed typically moves in quarter-percentage-point increments, this would imply two rate cuts this year.
Investors responded positively to the prospect of further rate cuts, with the Dow Jones Industrial Average climbing over 200 points following the announcement.
Rising Uncertainty
In its post-meeting statement, the FOMC highlighted the heightened uncertainty surrounding the current economic climate.
“Uncertainty around the economic outlook has increased,” the statement read. “The Committee is attentive to the risks to both sides of its dual mandate.”
The Fed is tasked with maintaining full employment and price stability.
The committee revised its economic growth forecast downward, projecting the economy to grow at just 1.7% this year, a 0.4 percentage point decrease from December’s forecast. Meanwhile, inflation expectations were revised upwards, with core prices now expected to rise at an annual pace of 2.8%, up 0.3 percentage points from the previous estimate.
The Fed’s “dot plot,” which illustrates members’ rate expectations, showed a slightly more hawkish stance compared to December. While only one participant previously expected no rate changes in 2025, four now share that view. Projections for future years remained unchanged, with two rate cuts anticipated in 2026 and one more in 2027, before the federal funds rate stabilises at a longer-term level of around 3%.
Scaling Back Quantitative Tightening
The Fed also announced a further reduction in its “quantitative tightening” (QT) programme, which involves gradually reducing the bonds held on its balance sheet.
Starting in April, the central bank will allow only $5 billion in maturing Treasury proceeds to roll off its balance sheet each month, down from $25 billion. However, the $35 billion cap on mortgage-backed securities remains unchanged, a level that has rarely been reached since the QT programme began.
Fed Governor Christopher Waller was the sole dissenting vote, though he agreed with holding rates steady. Waller opposed the decision to slow the QT programme, preferring it to continue at its current pace.
Tariffs and Economic Concerns
The Fed’s actions come amid a tumultuous start to Trump’s second term. The president has unsettled financial markets with tariffs on steel, aluminium, and other goods, targeting global trading partners. Further aggressive duties may follow, with a review set to be released on April 2.
The uncertainty surrounding these policies has dampened consumer confidence, with recent surveys showing inflation expectations rising due to tariffs. Retail spending grew in February, though at a slower pace than expected, as underlying indicators show consumers are weathering the challenging political climate.
Since Trump took office, stock markets have experienced volatility, with major indices fluctuating in and out of correction territory. Administration officials have warned of an economic shift away from government-driven stimulus towards greater reliance on the private sector.
Mixed Economic Signals
Bank of America CEO Brian Moynihan offered a more optimistic outlook earlier on Wednesday, countering recent pessimism on Wall Street. Moynihan noted that card data indicates consumer spending remains robust, with BofA economists forecasting 2% economic growth for the year.
However, cracks are beginning to appear in the labour market. Nonfarm payrolls grew at a slower-than-expected rate in February, while a broader measure of unemployment, which includes discouraged and underemployed workers, rose by half a percentage point to its highest level since October 2021.
