Federal Reserve officials said Wednesday that the economy needs higher interest rates than previously thought to curb inflation.
Fed officials still believe they will approve three rate cuts this year, but they have scaled back their expectations for rate cuts in coming years and slightly raised their expectations for the benchmark policy rate over the longer term.
Four times a year, the Fed releases its officials’ forecasts for growth, unemployment, inflation and core inflation. Officials also discussed what they think the Fed’s benchmark federal funds rate will be at the end of this year, the end of the next two years, and over the long term.
The Fed presents these forecasts in a variety of ways in its summary of economic forecasts. The overview includes calculating the predicted median and predicted range. It also includes a “central tendency” of forecasts that excludes the top three and bottom three forecasts.
As of December, the median of these forecasts was for the federal funds rate to be around 4.6% at the end of this year. This equates to a rate cut of 75 basis points (bp), or three-quarters of a percentage point.
The median value remained unchanged in the March forecast, but the central tendency increased from the previous trend range of 4.4 to 4.9 percent to 4.6 to 5.1 percent. The lowest estimate rose from 3.9% to 4.4%, while the highest estimate remained at 5.4%.
The median forecast for the end of 2025 rose to 3.9% from 3.6%, indicating that Fed officials expect to cut rates less next year than in previous years. The central tendency range increased from 3.1 to 3.9 percent to 3.4 to 4.1 percent. The lower end of all forecast ranges rose to 2.6%, while the upper end remained unchanged at 5.4%.
The median forecast for the end of 2026 rose from 2.9% to 3.1%. The central tendency is now 2.6 percent to 3.4 percent, rising from 2.5 percent to 3.1 percent. The overall forecast range remained unchanged at 2.4% to 4.9%.
Perhaps most notably, the Fed’s long-term policy rate outlook has increased from 2.5% to 2.6%. This is the first time since 2019 that the long-term outlook has exceeded 2.5%. The long-term central tendency is now 2.5 percent to 3.1 percent, compared with the previous forecast of 2.5 percent to 3 percent. The range remained unchanged at 2.4-3.8%.
The Fed’s overall inflation forecast for this year remains unchanged at 2.4%, but the core inflation rate is expected to be 2.6%, an increase of 0.2 points from the December forecast. Next year’s headline inflation rate is expected to rise from 2.1% to 2.2%, and the outlook for the core inflation rate remains unchanged at 2.2%. The long-term outlook for the next year and beyond remained unchanged at 2%.
Taken together, this suggests that Fed officials collectively expect to need to raise interest rates slightly to lower inflation to and maintain its 2% target. .
The Fed also expects further growth in the coming years. This year’s median gross domestic product (GDP) growth rate has been raised from 1.4% to 2.1%. For 2025, the median value increased from 1.8 to 2.0. The following year, it rose from 1.9 to 2.0. The long-term outlook remains unchanged at 1.8%.
Views on unemployment have also changed slightly. The unemployment rate is expected to rise to 4.0% this year, down from the initial median forecast of 4.1%. The 2025 forecast is unchanged at 4.1% and the 2026 forecast has been revised downward from 4.1% to 4.0%. The long-term median forecast remains at 4.1%.
