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WASHINGTON – In a highly anticipated decision on Wednesday, the Federal Reserve opted to maintain the benchmark interest rates, signaling potential reductions later this year. The rate-setting Federal Open Market Committee (FOMC) has kept the key borrowing rate in a range between 4.25% and 4.5%, consistent since December. This decision came as financial markets had largely discounted the possibility of any change during this week’s two-day policy meeting.
Alongside its decision, the Fed updated its projections for rates and economic indicators through 2027, while also adjusting the scale of bond holdings reduction in its balance sheet.
Despite ongoing concerns surrounding the effects of tariffs and a robust fiscal policy involving tax cuts and deregulation, Federal Reserve officials still anticipate an additional half percentage point reduction in rates through 2025. If the Fed sticks to its usual practice, this would imply two quarter-point cuts this year.
Following the announcement, investors reacted positively, with the Dow Jones Industrial Average soaring over 400 points. However, at a subsequent news conference, Fed Chair Jerome Powell cautioned that the central bank remains prepared to keep interest rates high if the economic conditions remain stable. He stated, “If the economy remains robust, and inflation doesn’t move sustainably toward our target of 2%, we are willing to maintain policy restraint for an extended period.” He added that adjustments could be made if there are unexpected weaknesses in the labor market or unexpected declines in inflation.
Heightened Uncertainty
The FOMC’s post-meeting statement alluded to an enhanced level of uncertainty regarding the economic landscape. “Uncertainty about the outlook has increased,” the statement noted. “The Committee remains attentive to risks that could impact both sides of its dual mandate.” This dual mandate includes striving towards full employment while maintaining price stability.
During the press briefing, Powell mentioned a noticeable “moderation in consumer spending” alongside potential price pressures due to tariffs. These factors seem to have influenced a more cautious stance in the FOMC’s economic outlook.
The committee has revised its growth forecast downward, projecting an expansion of just 1.7% for the year—0.4 percentage points lower than previously anticipated. In terms of inflation, the core price growth estimate was raised to 2.8% annually, indicating a 0.3 percentage point increase from earlier forecasts.
According to the “dot plot” indicating officials’ expected rate movements, there is a tilt towards a more cautious stance compared to December. At the previous meeting, only one member expected rates to remain unchanged in 2025, whereas this number has now risen to four.
The projections suggest stability in rates for future years, with expectations of two cuts in 2026 and one in 2027, leading to a potential long-term fed funds rate settling around 3%.
Adjustments to ‘Quantitative Tightening’
Along with its decision on rates, the Fed announced a reduction in its “quantitative tightening” initiative, which involves a gradual contraction of bond purchases. Consequently, the Fed will now permit only $5 billion in maturing Treasury proceeds to roll off monthly, reduced from the previous $25 billion. The cap on mortgage-backed securities remains at $35 billion, a target that has seldom been reached since the program commenced.
Fed Governor Christopher Waller cast the sole dissenting vote regarding the recent decisions; he was in favor of stabilizing rates but preferred maintaining the rate of quantitative tightening. Jamie Cox, managing partner at Harris Financial Group, remarked, “The Fed indirectly cut rates today by deciding to slow down the pace of Treasury runoff. This was a prudent choice given the landscape of risks, and it sets the stage for potentially ending the runoff by summer, with the hope that inflation data will guide a future decrease in Federal Funds rates.”
The Fed’s recent actions come against the backdrop of a tumultuous start to President Trump’s second term, during which tariffs have been introduced on various imports, unsettling financial markets. The administration is also poised to introduce additional tariffs following a scheduled review due on April 2.
This environment of uncertainty has affected consumer confidence, as recent surveys indicate rising inflation expectations linked to tariffs. Retail spending saw an increase in February, though it fell short of expectations, suggesting consumers are still navigating challenges amid a turbulent political backdrop.
Stock markets have been volatile since the beginning of Trump’s presidency, with major indices fluctuating between correction territory amid discussions about transitioning from government-led stimulus to a more private sector-driven economic outlook.
Despite the prevailing concerns, Bank of America CEO Brian Moynihan offered a counterpoint earlier on Wednesday, asserting that spending remains robust, with expectations for a 2% growth in the economy this year based on card transaction data.
Nonetheless, signs of a weakening labor market have emerged, with nonfarm payroll growth in February falling short of estimates. Additionally, a broader measure of unemployment, including discouraged and underemployed individuals, rose half a percentage point, reaching its highest level since October 2021.
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