- The Fed kept interest rates steady at 4.25%-4.5%, but hinted at possible cuts later this year.
- GDP growth was downgraded to 1.7%, while inflation projections rose to 2.8%.
- Tariffs and economic uncertainty continue to shake markets, with stocks fluctuating in response.
In a closely watched move, the Federal Reserve decided to keep interest rates unchanged on Wednesday, maintaining its stance despite growing concerns over economic turbulence. However, officials hinted that rate cuts are likely later this year, offering investors a sliver of optimism.
Uncertainty Looms as Fed Stays Cautious
With the economy showing cracks, especially amid Trump’s aggressive tariff policies and shifts in fiscal policy, the Federal Open Market Committee (FOMC) opted to keep borrowing rates between 4.25% and 4.5%, unchanged since December.
Markets fully expected this decision, pricing in virtually zero chance of a rate adjustment at this meeting. Alongside the decision, the Fed also updated its projections for interest rates and economic performance through 2027.
Key Takeaways from the Fed’s Decision
- The Fed still expects two rate cuts in 2025, likely in quarter-point increments.
- GDP growth was downgraded to 1.7% for the year, down from 2.1% in December.
- Inflation projections ticked up to 2.8%, compared to the previous 2.5% estimate.
- Market reaction was positive, with the Dow Jones Industrial Average jumping 200+ points after the announcement.
Scaling Back Quantitative Tightening
In another policy shift, the Fed announced a slower pace of reducing its bond holdings, essentially injecting a small dose of liquidity into the system.
- The Fed will now only allow $5 billion in Treasury securities to roll off per month, a sharp slowdown from the previous $25 billion rate.
- The $35 billion cap on mortgage-backed securities remains unchanged, though it has rarely been hit since the process began.
- Fed Governor Christopher Waller dissented, agreeing with steady rates but opposing the slower balance sheet reduction.
This move loosens monetary policy slightly, offering relief to long-term borrowers and financial markets.
Tariffs, Trade Wars, and Economic Jitters
The decision comes amid Trump’s second-term policy shifts, which have rattled markets with tariffs on steel, aluminum, and other imports. An even more aggressive wave of duties is expected following a scheduled review on April 2.
- Consumer confidence has taken a hit, with surveys indicating rising inflation expectations due to tariffs.
- Retail spending saw a modest increase in February, but not as strong as anticipated.
- Stocks remain fragile, dipping in and out of correction territory as uncertainty lingers.
Labor Market Shows Cracks
While consumer spending holds steady, the job market is starting to show weakness:
- Nonfarm payrolls grew at a slower pace than expected in February.
- A broader unemployment measure, which includes discouraged and underemployed workers, jumped half a percentage point, marking its highest level since October 2021.
What’s Next?
Fed Chair Jerome Powell will address the media at 2:30 PM ET, likely offering insights into how the central bank plans to navigate inflation, tariffs, and economic risks in the months ahead.
Markets will be closely watching for any signals of when rate cuts could begin and whether the Fed is preparing for a deeper slowdown.
