As expected, the Federal Reserve on Wednesday kept interest rates unchanged at the current range of 4.25% to 4.50%, but there still may be two cuts coming later this year.
The benchmark federal funds rate remains at the same level it reached in December of last year, after a series of three rate cuts in the second half of 2024 shaved a full percentage point off the rate that banks charge each other for borrowing. Officials said they still expect to make rates cuts worth a total of half of a percentage point in 2025.
Officials at the Fed remain cautious due to inflation still exceeding the stated target of 2%, and the haphazard implementation of tariffs and other economic issues that have left many questioning the health of the overall economy.
Uncertainty and tariffs were the watchwords on Wednesday, after the central bank’s Federal Open Market Committee (FOMC), which sets national monetary policy, released a statement saying that “uncertainty around the economic outlook has increased.” Because of the fluid situation, the committee now expects economic growth in 2025 to be 1.7%, down 0.4% from the Fed’s previous projections in December.
At the same time, the committee raised its forecast for inflation this year to 2.8%, up 0.3% from its previous estimates. They also predict unemployment to rise to 4.4%. Such predictions left some analysts worrying about stagflation, which is when an economy experiences higher inflation along with stagnant economic growth and rising unemployment.
But despite a somewhat gloomy picture, the FOMC still endorsed the future rate cuts, which would lower the federal funds rate to between 3.75% and 4.00% by the end of 2025. The FOMC members also expect there to be possibly two more rate cuts in 2026.
Fed Chair Jerome Powell said in his press conference following the FOMC announcement that consumer spending moderated in recent months and that most economists expect President Donald Trump’s tariff policies to increase inflation. In fact, there were some signs that tariffs may be already having an effect. But Powell said it was unclear yet which tariffs will be implemented and what the full impact will be on the economy.
Powell, however, reiterated that the U.S. economy remained strong, and while job growth has slowed it continues to be healthy. He said that some of the inflationary impacts of tariffs may be “transitory,” and that the Fed would have to wait and see. But he added that they remain ready to act when they see economic evidence that a change in policy is needed.
Despite Powell’s positive words, many observers were concerned about the Fed’s position. William Dudley, former president and CEO of the Federal Reserve Bank of New York, told Bloomberg News that Powell gave a reassuring performance, but there are a lot of unknowns facing the Fed, including the inflationary impact of tariffs. He said the risk for the Fed is not taking the necessary actions at the right time.
“They are flying blind right now,” Dudley said of the Fed policymakers.
Bloomberg correspondent Michael McKee, who attended Powell’s conference, was even more blunt in his assessment of the Fed’s problems, saying “they don’t have any idea what is going on.”
Mortgage Bankers Association Senior Vice President and Chief Economist Mike Fratantoni said the most significant change in policy at today’s meeting was the decision to markedly slow the pace of quantitative tightening beginning in April, dropping the pace of Treasury runoff from $25 billion to $5billion per month.
“A slower pace of quantitative tightening will prevent further liquidity strains in financial markets,” Fratantoni said. “In the near term, we expect mortgage rates to remain in a fairly narrow range, between 6.5% and 7%, which should support the spring housing market.”
