Federal Reserve Maintains Rate Stance, Raises Inflation Forecast, Lowers Growth and Employment Outlook
The Federal Reserve has maintained a wait-and-see stance on interest rates while raising its inflation forecast for the year and lowering growth and employment projections.
During its policy meeting, the central bank kept the federal funds rate at around 4.3%, as it assesses how the Trump administration’s sweeping changes in trade, immigration, spending, and tax policies will reshape the economic outlook. Consumer sentiment has declined in recent weeks amid headlines about federal spending cuts and tariff hikes.
"We believe this is a good time to wait for more clarity," Fed Chair Jerome Powell said at a press conference on Wednesday.
Investors were relieved that Powell did not take a more aggressive stance on potential tariff-driven price increases. The Dow Jones Industrial Average rose 0.9% (about 380 points), while the S&P 500 and Nasdaq Composite gained more than 1% each. According to the Fed’s latest economic projections, 11 out of 19 policymakers now expect at least two rate cuts this year, compared to 15 officials in December who expected the same.
Tariffs to Push Inflation Higher, Fed Sees Delay in Cooling Prices
Fed officials now expect inflation to rise to 2.7% this year, up from 2.5% in January. "This is actually due to the tariffs," Powell stated. He noted that progress in lowering inflation is likely to be delayed for the time being.
Currently, policymakers expect inflation to slow in 2026 and 2027, which suggests they see no reason to adjust rates in response to tariffs alone. "If inflation is something that would fade quickly without our intervention, sometimes it is appropriate to look past it," Powell said. "And that could be the case with tariff-driven inflation."
Lower Growth Projections, Policy Uncertainty Intensifies
Fed policymakers lowered their GDP growth forecast for 2025 from 2.1% (December forecast) to 1.7%. Over the past year, they have aimed for a balanced approach. Inflation had fallen from 5.5% two years ago to 2.5% in January, marking significant progress toward the Fed’s 2% target.
Officials have sought to avoid unnecessary economic slowdown while allowing price and wage growth to moderate. Between September and December 2024, the Fed cut rates by a full percentage point. However, they also do not want to reverse recent progress on inflation.
The Trump administration’s policy shifts make growth and inflation projections more challenging. Deregulation and measures to lower energy prices could boost growth and help inflation cool further. Meanwhile, recent economic data presents a mixed picture—consumer spending has slowed, but employment remains stable, with the February unemployment rate at 4.1%.
"The economy is still in pretty good shape, and employment remains stable," said Frank Sorrentino, CEO of ConnectOne Bank, which manages $9.9 billion in assets in Englewood Cliffs, New Jersey. However, he noted that policy-driven uncertainty has caused loan demand to slow.
"We will find ways to navigate through this, but people are struggling to decide whether to start, stop, slow down, or speed up their plans. This makes it very, very difficult for businesses to operate effectively," Sorrentino added.
Tariffs Could Complicate Fed’s Rate Decisions
Excluding food and energy, goods prices declined for most of last year, significantly contributing to slowing inflation. However, prices have recently started rising again.
Michael Reid, chief U.S. economist at RBC Capital Markets, warned that the Fed faces a growing challenge.
"On one hand, there are signs of a slowing labor market, but much of this data does not immediately appear in employment reports. On the other hand, tariffs could push inflation higher throughout the rest of the year," Reid said.
A combination of stagnant growth and rising prices—often referred to as stagflation—could make it more difficult for the Fed to preemptively cut rates in response to economic slowdown.
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