Fed keeps Rates Unchanged Despite Concerns about Trump, Seeing Weaker GDP and Greater Inflation

For the second consecutive meeting, the Federal Reserve kept interest rates unchanged on Wednesday and upheld its earlier forecast of two rate cuts this year.

However, in the face of uncertainty surrounding President Trump’s plans to apply a sweeping array of additional tariffs on top of those already levied on China, Canada, and Mexico, the central bank did alter its assessment of inflation and economic growth.

Fed policymakers now believe that economic growth will be slower than expected and that inflation will remain higher this year than initially projected. By the end of 2025, policymakers predict that the main Personal Consumption Expenditures (PCE) measure of inflation will have increased from 2.5% to 2.8%.

Additionally, rather than 2.1%, the US economy is now expected to grow at an annualized rate of 1.7%. The unemployment rate is anticipated to increase from 4.3% to 4.4% gradually. During a news conference on Wednesday, Fed Chair Jerome Powell stated that “uncertainty is remarkably high” and that “there are so many things we don’t know.”

Tariffs, however, are known to “tend to bring growth down, and they tend to bring inflation up.” He conceded that the tariffs account for at least a “good part” of the Fed’s revised inflation outlook this year, but his “base case” is that the tariffs’ inflationary impact will only last temporarily.

Powell stated that although the Fed’s aim of lowering inflation “is probably delayed for the time being,” policymakers believe the target will still be met by 2027.

Powell has also consistently stressed a wait-and-see approach to assessing the economic impact of policy changes. He did the same Wednesday at his press conference, telling reporters that the Fed focuses on “separating the signal from the noise” when evaluating how Trump’s policies may affect the economic outlook. “We do not need to be in a hurry to adjust our policy stance,” Powell said.

The Fed has held borrowing costs steady for two consecutive meetings, maintaining its benchmark interest rate of 4.25%-4.5%. The pause follows three successive rate cuts in late 2024.

Additionally, the central bank declared that it would start cutting the rate at which treasuries are being removed from its balance sheet in April, lowering the total amount that may be rolled off from $25 billion to $5 billion. However, the Fed will continue to pull down $35 billion worth of mortgage-backed assets each month.

Because he would have liked to maintain the existing rate of decrease in allowing bonds to expire off the Fed’s balance sheet, Fed Governor Chris Waller dissented from Wednesday’s decision. He supported the decision to maintain rates at their current level.

Even though a widely analyzed “dot plot” indicated that many policymakers preferred fewer or no rate reduction in 2025, Waller and his Fed colleagues on Wednesday maintained their median forecast, initially issued in December, for two rate cuts in 2025.

Four authorities report one cut, nine report two, and four report no cutbacks. Given the growing uncertainty around both of those objectives, the Fed’s most significant task in the future may be striking a balance between the pillars of its mandate: price stability and maximum employment.

Investors are particularly concerned about the potential for a situation known as stagflation, which was last observed in the US in the 1970s, in which GDP stops, inflation continues, and unemployment increases.

In answer to a query from Yahoo Finance, Powell dismissed any analogies to that era, stating, “I don’t see any reason to think we are looking at a replay of the 1970s.” Regarding inflation, some new issues may surface in the upcoming measurement of core PCE, the Fed’s favored inflation indicator.

The measure, which is expected to be announced next week, demonstrates that the gauge stayed high in February, increasing to 2.7% from the 2.6% recorded in January. That still falls well short of the Fed’s ultimate 2% target. Although he admitted that consumer surveys reveal short-term concerns about inflation, he said there isn’t a close correlation between survey results and accurate statistics. Expectations for long-term inflation “really haven’t moved.”

“We will observe for signs of weakness in the real data.” As the Trump administration implements new policies, he said, “it’s going to be a challenge” for the central bank to manage the next time.