The Federal Reserve decided to keep interest rates unchanged in a recent meeting, which marks the second consecutive meeting with this decision. The central bank is sticking to its forecast for two more rate cuts this year. However, officials are bracing for higher inflation and slower growth due to President Trump’s policies, which have created uncertainty about the economic outlook. The decision to hold rates steady extends a pause in rate cuts that began in January, following earlier cuts in 2024 that lowered borrowing costs by one percentage point.
The Fed is closely watching President Trump’s economic plans, including potential tariffs that could impact future rate cuts. Fed Chair Jerome H. Powell acknowledged that tariffs could delay progress on reaching the central bank’s 2 percent inflation target. The uncertainty surrounding tariffs could also make it harder to gauge inflation levels. Despite these challenges, investors reacted positively to the Fed’s decision, with stocks ending the day higher. The president’s threat of reciprocal tariffs could have a significant impact on the economy if implemented.
The Fed’s economic projections show that most officials expect interest rates to decline this year, with estimates ranging from 3.75 percent to 4 percent. However, some officials forecast no additional cuts or just one cut, while others predict a more significant decrease. Economic growth projections have been revised downward to 1.7 percent for this year, with an increase in core inflation estimates compared to previous forecasts. Powell emphasized the importance of patience in making policy decisions given the current economic conditions.
There is concern that the effects of President Trump’s policies, including tariffs, government spending cuts, and immigration policies, could lead to increased inflation and disrupt the economy’s resilience. Powell noted that the recent decline in consumer confidence could be related to policy changes at the beginning of the administration. The Fed’s goal of achieving low, stable inflation and a healthy labor market may be challenged if inflation risks from tariffs materialize as expected by some economists.
The Fed announced a shift in its balance sheet reduction policy to avoid funding market disruptions due to the debt ceiling standoff. The monthly cap for Treasury securities rolling off the balance sheet will be reduced to $5 billion from $25 billion, with the cap for mortgage-backed securities remaining unchanged. This decision aims to prevent any potential disruptions that could arise from limitations on government borrowing. Fed Governor Christopher Waller voted against this decision, highlighting the challenges the central bank may face in navigating policy choices in the future.
