WASHINGTON — The Federal Reserve decided to maintain its primary interest rate on Wednesday, while suggesting they still anticipate two rate cuts this year, despite persistent high inflation.
According to updated quarterly economic projections also released Wednesday, the Fed anticipates a slower economic growth rate for both this year and the next compared to their forecast three months prior. They predict growth will decrease to just 1.7% in 2025, a drop from 2.8% the previous year, and then reach 1.8% in 2026. Furthermore, policymakers expect a slight rise in inflation, reaching 2.7% by the close of 2025, up from the current 2.5%. Both figures exceed the central bank’s target of 2%.
At a press conference, Fed Chair Jerome Powell stated that President Donald Trump’s tariffs have begun to slightly increase inflation and are likely to impede the progress the central bank has made in lowering inflation in recent years.
“I believe we were nearing” price stability, Powell said. “I wouldn’t say we were there yet. … I do believe that with the introduction of tariff-related inflation, further advancement may be delayed.” However, he also noted that the Fed still anticipates inflation nearing 2% by the end of the following year.
Fed policymakers also project a slight increase in the unemployment rate to 4.4% by the end of this year, compared to the current rate of 4.1%.
These projections highlight the challenging position the Fed might encounter this year. Typically, higher inflation would prompt the Fed to maintain or even raise its key interest rate. Conversely, slower growth and increased unemployment would generally lead the Fed to lower rates to stimulate borrowing and spending and boost the economy.
This marks the second consecutive meeting where the Fed has held its interest rate steady at approximately 4.3%, as the central bank observes the effects of the Trump administration’s policies on the economy. Economists predict that tariffs are likely to push inflation higher, at least temporarily. However, other policies, such as deregulation, could potentially reduce costs and moderate inflation.
Powell acknowledged that numerous business and consumer surveys have indicated growing concern regarding the economic outlook. Nevertheless, he pointed out that the unemployment rate remains low and the economy continues to expand.
“We recognize that sentiment has declined considerably, but economic activity has not yet,” Powell stated. “The economy appears to be robust.”
Powell emphasized that uncertainty surrounding the economic outlook is “unusually high” and indicated that the Fed is prepared to be patient and monitor the economy’s developments before taking further action.
“We are not going to be hasty in making any moves,” he stated. “We are in a good position to await further clarity and are not in any hurry.”
The Fed also announced a slowdown in the reduction of its Treasury holdings, which had significantly increased during and after the pandemic. Previously, it had allowed $25 billion of Treasurys to mature each month without reinvesting the proceeds. Now, it will only allow $5 billion to mature each month.
In essence, the Fed will reinvest a larger portion of the expiring bonds into new securities, which is expected to keep interest rates on long-term Treasurys lower than they would otherwise be. Powell described the change as a technical adjustment unrelated to its interest-rate policies. Yields experienced a slight decrease in Treasury markets.
Federal Reserve Governor Christopher Waller dissented from the decision to slow down Treasury purchases. The Fed is still permitting $35 billion of mortgage-backed securities to mature each month.
Currently, growth seems to be decelerating in the first three months of the year, but the impact of tariffs on inflation has not yet been observed. However, economists at Goldman Sachs predict that import taxes will drive inflation to 3% by the end of this year.
Fed officials are closely monitoring measures of Americans’ inflation expectations, which surged in a survey released just last week. Inflation expectations—a gauge of how concerned people are that inflation will worsen—are crucial to the Fed because they can be self-fulfilling. If people anticipate higher inflation, they may take actions, like accelerating purchases, that could increase prices.
Retailers of both high-end and lower-cost goods have cautioned that consumers are becoming more cautious as they anticipate price increases due to tariffs. Retail sales saw a modest increase last month after a sharp decline in January. Homebuilders and contractors anticipate that home construction and renovations will become more expensive.
Many economists have significantly lowered their growth forecasts for this year, with Barclays, a bank, now projecting growth of just 0.7%, down from 2.5% in 2024. Additionally, economists at Goldman Sachs now anticipate that inflation—excluding the volatile food and energy categories—will increase to 3% by the end of this year, up from its current level of 2.6%.
AP Business Writer Alex Veiga in Los Angeles contributed to this report.
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