The Federal Reserve remains stable at 4.25% to 4.5% in the second consecutive meeting, leaving benchmark interest rates unchanged on Wednesday, and officials signaled that inflation rates remained more sticky than expected, even as economic growth shows signs of slowing.
The decision reflects growing uncertainty regarding the economic outlook. Fed officials have raised their 2025 inflation forecasts, but now expect core inflation to end from 2.8% to the December forecast. At the same time, they reduced their GDP growth forecast to 1.7%, downgraded from the previous 2.1%. Additionally, the unemployment rate is expected to be high, reaching 4.4% by the end of the year, but officials still believe the labor market is wide and stable.
The Fed's latest forecast shows a split stance on interest rate cuts. The median forecast still expects two cuts this year, but the consensus has weakened. The eight policymakers are currently looking at only one cut or not at all, reflecting growing concerns that inflation will not return to the Fed's 2% target as desired. This shift raises questions about whether the Fed's rate cuts in late 2024, which combined full percentage points, were premature given the continued persistence of inflation.
In its statement, the Fed said “uncertainty about the economic outlook is increasing,” removing the previous language, suggesting that employment and inflation risks are balanced. Despite easing growth expectations, Fed officials are not predicting a sharp economic downturn. Instead, they forecast GDP growth this year to be 1.7%, and 1.8% in 2026 and 2027. Unemployment is expected to rise gradually, but remains low by historical standards.
Although emotional surveys have weakened over the past few months, difficult economic data remains relatively strong. Home launches and industrial production surged in February, with retail sales rising more than expected, suggesting that consumer demand and business activity have not deteriorated as bad as some research indicators suggest. This difference between research-based data and actual economic performance has led investors and policymakers to closely watch for signs of whether the economy is truly cooling, or whether concerns about slowing down are exaggerated.
In addition to its stable holdings, the Fed has announced that it will slow down its balance sheet cuts and reduced its Treasury roll-off cap from $25 billion a month to $5 billion to avoid financial disruption. The decision aimed at maintaining stability in the capital market amid concerns over debt caps was not unanimous. Federal Governor Christopher Waller opposed and agreed to continue at the previous pace.
The market responded positively to the announcement. The S&P 500 has risen, as investors interpreted the decision as a sign that rate cuts are still likely this year, even if inflation exceeds its target. Federal Reserve Chair Jerome Powell is scheduled to hold a press conference at 2:30pm. It is hoped that authorities will address the balance between the need to support economic growth and the risk of inflation.
