The Federal Reserve left its benchmark interest rate unchanged on Wednesday, holding steady at 4.25 percent to 4.5 percent for a second consecutive meeting as officials signaled that inflation remains stickier than expected, even as economic growth shows signs of slowing.
The decision reflects growing uncertainty about the economic outlook. Fed officials raised their inflation forecast for 2025, now expecting core inflation to end the year at 2.8 percent, up from 2.5 percent in their December projections. At the same time, they lowered their GDP growth forecast to 1.7 percent, a downgrade from 2.1 percent previously. Unemployment is also expected to tick higher, reaching 4.4 percent by year’s end, though officials still see the labor market as broadly stable.
The Fed’s latest projections indicate a divided stance on rate cuts. While the median forecast still anticipates two cuts this year, the consensus has weakened. Eight policymakers now see either only one cut or none at all, reflecting growing concern that inflation will not return to the Fed’s 2 percent target as quickly as hoped. The shift raises questions about whether the Fed’s rate cuts in late 2024, which totaled a full percentage point, were premature, given inflation’s continued persistence.
In its statement, the Fed noted that “uncertainty around the economic outlook has increased”, removing previous language suggesting that the risks to employment and inflation were balanced. Despite softening growth expectations, Fed officials are not predicting a sharp economic downturn. Instead, they project a period of slower but steady expansion, with GDP growth at 1.7 percent this year and 1.8 percent in 2026 and 2027. The unemployment rate is expected to rise gradually but remains low by historical standards.
Although sentiment surveys have weakened in recent months, hard economic data has remained relatively strong. Housing starts and industrial production surged in February and retail sales have held up better than expected, suggesting that consumer demand and business activity have not deteriorated as much as some survey indicators imply. This divergence between survey-based data and actual economic performance has left investors and policymakers closely watching for signs of whether the economy is truly cooling or whether concerns about a slowdown are overstated.
In addition to holding rates steady, the Fed also announced a slower pace of balance sheet reduction, lowering the cap on Treasury roll-offs from $25 billion to $5 billion per month to avoid financial disruptions. The decision, aimed at maintaining stability in funding markets amid concerns over the debt ceiling, was not unanimous. Fed Governor Christopher Waller dissented, arguing in favor of continuing at the previous pace.
Markets reacted positively to the announcement. The S&P 500 rose, while Treasury yields fell, as investors interpreted the decision as a sign that rate cuts are still likely this year, even as inflation remains above target. Federal Reserve Chair Jerome Powell is scheduled to hold a press conference at 2:30 p.m., where he is expected to address how officials are balancing inflation risks against the need to support economic growth.
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