Fed holds rates steady, warns of higher inflation and slower growth

The Federal Reserve left its benchmark interest rate unchanged on Wednesday, maintaining its target range at 4.25% to 4.5%, while signaling higher inflation and weaker economic growth for 2025.

In its latest economic projections, the Fed raised its inflation forecast for the year, now expecting its preferred measure—the core personal consumption expenditures (PCE) index, excluding food and energy—to end 2025 at 2.8%, up 0.3 percentage points from its December estimate.

At the same time, officials downgraded their economic growth outlook, projecting GDP expansion of 1.7%—down from 2.1% in the previous forecast.

Fed policymakers continue to anticipate at least two rate cuts later this year, but Chair Jerome Powell struck a cautious tone during a press conference following the two-day policy meeting.

“Growth looks like it’s maybe moderating a bit, consumer spending moderating a bit, but still at a solid pace,” Powell said. He pointed to ongoing labor market strength, with unemployment at 4.1% and job creation at a healthy level, but acknowledged inflation pressures remain a key concern.

Tariffs and Policy Shifts Cloud Economic Outlook

Powell attributed part of the inflationary pressure to trade policies introduced by the Trump administration, including higher tariffs on imports.

“We have tariffs coming in—we don’t know how big, what speed,” Powell said. “But we kind of know there are going to be tariffs, and they tend to bring growth down; they tend to bring inflation up in the first instance.”

The Fed’s concerns come as economic indicators point to slowing momentum.

• Consumer spending fell 0.5% in January, while February retail sales rose just 0.2%, well below expectations.
• Consumer sentiment has weakened, with surveys by the Conference Board and University of Michigan showing growing concerns about future price pressures.
• Goldman Sachs cut its 2025 GDP forecast to 1.7% from 2.4%, citing more aggressive trade restrictions and expectations of near-term economic weakness.

The Fed is also monitoring the broader impact of the Trump administration’s policy agenda, which includes tariff increases, widespread layoffs of federal employees, and mass deportation plans.

Economists warn that these factors could exacerbate inflation while dampening growth, creating a stagflation-like environment that would complicate the central bank’s policy decisions.

Markets Watch for Rate Cut Signals

Despite higher inflation projections, Powell emphasized that the Fed is in no rush to adjust borrowing costs.

“We do not need to be in a hurry to adjust our policy stance, and we are well positioned to wait for greater clarity,” he said.

His comments echoed the latest statement from the Federal Open Market Committee (FOMC), which noted that “economic activity has continued to expand at a solid pace” but acknowledged “uncertainty around the economic outlook has increased.”

While inflation has remained elevated, recent data suggests price pressures have not accelerated dramatically. The Bureau of Labor Statistics reported last week that core consumer prices rose just 0.2% in February, following a 0.4% increase in January.

Much of the gain was driven by higher shelter costs (+0.3%) and used vehicle prices (+0.9%), rather than broad-based inflationary pressures.

Powell reiterated the Fed’s commitment to its 2% inflation target, while acknowledging that achieving it may take longer than previously expected.

“We see this in both market and survey-based measures,” Powell said. “However, most measures of longer-term inflation expectations remain consistent with our 2% goal.”

For now, Fed officials appear content to hold rates steady, allowing time for recent policy shifts and inflation trends to play out before making further adjustments.

The next FOMC meeting is scheduled for May, when officials will reassess their outlook amid fresh economic data.

Comments are closed.