The Federal Reserve announced Wednesday that it is keeping its benchmark interest rate unchanged, maintaining the federal funds rate at 4.25% to 4.5%.
This is the second straight meeting where the central bank has decided to hold rates steady, citing ongoing economic uncertainty and stubbornly high inflation.
The Federal Open Market Committee (FOMC) indicated that economic conditions have become increasingly unpredictable, with potential risks to both promoting maximum employment and maintaining long-term inflation at 2%. Following a series of interest rate cuts last year, including a 50-basis-point reduction in September and two 25-basis-point cuts in November and December, the Fed is now exercising caution before making further moves.
Policymakers are projecting two 25-basis-point interest rate cuts later this year, followed by similar reductions in 2026 and 2027. Economic growth forecasts have been revised downward, with real GDP now expected to grow at just 1.7% by the end of 2025, a decrease from the previous estimate of 2.1%. The unemployment rate is also expected to increase to 4.4% by December, up from the 4.3% prediction made earlier.
The Federal Reserve’s preferred inflation measure, the Personal Consumption Expenditures (PCE) index, is now projected to end the year at 2.7%, higher than the previous estimate of 2.5%.
Fed Chair Jerome Powell acknowledged that near-term inflation expectations have increased, pointing to both market-based and survey-based indicators. He also noted that the labor market is not currently a significant source of inflationary pressure, even as inflation remains somewhat above the 2% target.
Powell admitted that tracking the impact of tariffs on inflation remains difficult. He suggested that a significant part of the rising inflation figures could be traced back to the Trump administration’s import tariffs, but distinguishing tariff-related inflation from other factors remains a challenge.
While the Federal Reserve is choosing to remain patient, President Donald Trump has made it clear he believes the central bank is making a mistake. In a post on his Truth Social platform, Trump argued that the Fed should be cutting rates, especially as tariffs begin to weigh on the economy.
According to Trump, the Fed needs to take immediate action to address the economic fallout from the import tariffs his administration put in place.
Despite Trump’s criticism, Powell remained cautious, stating that the Federal Reserve is “well positioned to wait for further clarity” before making any drastic moves. According to Powell, the current policy stance is appropriate given the uncertainties the Fed is trying to navigate.
Projections suggest the Federal Reserve’s target inflation rate of 2% is unlikely to be achieved before 2027, with tariffs contributing to the elevated inflation figures. The Fed is also monitoring the possibility of higher unemployment if economic growth continues to weaken. Powell emphasized that the central bank remains prepared to act if conditions change significantly.
Economic projections for the next three years indicate that growth could be the weakest seen since the early years of the Obama administration, which was marked by a slow recovery from the 2007-2009 recession.
Adding to the uncertainty, the Fed announced it would slow the ongoing drawdown of its $6.81 trillion balance sheet, known as quantitative tightening. This decision was met with opposition from Fed Governor Chris Waller, who dissented over concerns related to balance sheet policy.
Market indicators such as the CME FedWatch tool currently place the probability of the Federal Reserve cutting rates in May at nearly 55%. Powell, however, insisted that the Fed is not rushing to judgment and intends to gather more information before making any policy adjustments.
Powell also addressed concerns about recession risks, stating that while there is always a possibility of recession, outside forecasts suggest moderate chances rather than anything imminent. He maintained that while the likelihood of recession has risen slightly, it remains relatively low compared to earlier predictions.
The Federal Reserve’s next policy meeting is scheduled for May 6-7, with market participants eagerly awaiting signs of whether the central bank will move forward with the anticipated interest rate cuts.