- The Fed kept interest rates steady at 4.25% to 4.5%, citing rising economic uncertainty.
- Quantitative tightening is slowing down, with balance sheet reductions cut from $25B to $5B per month.
- Inflation expectations rose to 2.7% for 2025, while unemployment is projected to hit 4.4% by year-end.
The Federal Reserve decided to keep interest rates unchanged on Wednesday, signaling concerns over economic uncertainty while also downgrading growth forecasts. This cautious stance comes at a time of policy turbulence, with trade and fiscal policies in constant flux.
Why It Matters
With certain economic indicators showing signs of weakness, the Fed is treading carefully. Even as policymakers see risks ahead, they prefer a wait-and-see approach, keeping their options open.
Key Takeaways From the Fed’s Decision
- The Federal Open Market Committee (FOMC) kept the federal funds rate at 4.25% to 4.5%, unchanged since December.
- Economic uncertainty has increased, according to newly added language in the Fed’s statement.
- The median GDP growth forecast was lowered to 1.7%, down from 2.1% in December projections.
- Fed officials still expect two
- in 2025, in line with earlier predictions.
A Slowdown in Quantitative Tightening
In a notable shift, the Fed announced a slowdown in its balance sheet reduction plan, meaning its financial system support will be withdrawn at a slower pace.
- Instead of allowing $25 billion in Treasury securities to roll off its balance sheet each month, the Fed will now only reduce it by $5 billion.
- This effectively loosens monetary policy slightly, easing long-term borrowing costs and boosting financial asset values.
Notably, Governor Christopher Waller dissented, disagreeing with the change in balance sheet policy while supporting the decision to hold interest rates steady. This marks only the second time in two decades that a governor has dissented on a monetary policy move.
The Trump Administration’s Economic Impact
Fed officials acknowledge that Trump’s broad policy shifts—including tariffs, deregulation, and immigration restrictions—could significantly affect economic conditions.
- Despite these changes, the Fed remains uncertain about their net effect on inflation and job markets, leading them to hold rates steady for now.
- Survey data suggests early signs of economic slowdown, but broader indicators—like unemployment rates—have remained stable.
Economic Forecast Adjustments
The Fed’s latest projections highlight growing concerns about inflation and economic growth:
- Inflation expectations rose to 2.7% for 2025, up from 2.5% in December.
- The unemployment rate is now expected to hit 4.4% by year-end, slightly higher than the 4.3% estimate from previous forecasts.
What Fed Officials Are Saying
“As we navigate these evolving conditions, we must focus on separating signal from noise in our decision-making,” Fed Chair Jerome Powell stated earlier this month.
“We are in no rush and are positioned to wait for greater clarity before making any major moves,” he added.
What’s Next?
Powell will take questions from the media at 2:30 PM ET, where analysts expect him to clarify the Fed’s stance on future rate cuts and economic risks.
Markets will be closely watching for any shifts in tone that could signal how the Fed plans to tackle inflation and economic uncertainty moving forward.
