The Federal Reserve did not change interest rates for the second consecutive time at Wednesday's meeting, and authorities stuck to previous forecasts for two more cuts this year.
However, policymakers have shown that President Trump's policies are hampering higher inflation and slower growth.
The central bank's decision to keep interest rates between 4.25% and 4.5% has extended the suspension since January after reducing borrowing costs by 1 percentage point, following a series of cuts in late 2024.
Whether the Fed will eventually cut again will depend on Trump's economic plans, including cleaning fees he threatened or charged when it was cut again this year. Wednesday's meeting showed the most direct recognition of the central bank's ever known that the president's policies are set to have a real impact on the economy.
Federal Reserve Chairman Jerome H. Powell acknowledged at a press conference that tariffs meant that reverting inflation to the central bank's 2% target “may delay further progress.”
Powell said tariffs could make signalling from inflation even more difficult. “In the current situation, the uncertainty is very high,” he said.
Investors appeared to welcome the Fed's decision despite uncertainty about the future. Stocks eased from their early highs, but the S&P 500 rose 1.1%, increasing the day.
Powell's comments come as the president threatened tariffs beyond what many economists and policymakers initially expected. After a lot of flip-floping, certain imports from Canada, Mexico and China are collected and are now being collected along with all foreign steel and aluminum tariffs that come to the US. Trump and his advisors are currently working on what is called mutual tariffs. This is scheduled to be announced on April 2nd, coinciding with tariffs other countries charge on US exports, while also taking into account other penalties such as taxes and currency manipulation.
The fear is that these policies, coupled with Trump's efforts to cut government spending and international migration, will not only intensify pressure on already sticky prices, but will also knock off courses that have been an incredibly resilient economy. Taxes and deregulation measures can help support growth to some extent. Therefore, the Fed mainly focuses on the net effect of the government agenda.
Asked about the recent turn of sentiment data suggesting that consumers have lost a lot of confidence in their economic outlook, Powell said the “very negative” shift “has been linked to the chaos at the beginning of an administration that is likely bringing about major changes in policy.”
These dynamics were fully displayed in a new set of economic forecasts issued by the Fed, capturing the most comprehensive analysis of civil servants as Trump began implementing some of his economic agenda.
Most officials expect interest rates this year to fall from 3.75% to 4% this year, as was the case if the forecast was last published in December. But eight policymakers have predicted either an additional cut or one. Only two people thought the Fed would fall by 0.75 percentage points. It will be converted into three quarter point cuts.
By the end of 2026, most officials expect interest rates to fall from another 3.25% to 3.5% before falling to about 3% in 2027.
Fed officials now believe the economy has only increased by 1.7% this year compared to initial expectations of a 2.1% expansion, and they predict the unemployment rate will rise to 4.4%. Authorities also raised forecasts for core inflation, which will bring volatile food and energy prices to 2.8%. Back in December, they expected it to end at 2.5%, but it was already a big step up from previous estimates.
Powell said the Fed can afford to be patient at this point, especially given the assessment that the economy is still in a good place.
“We're not going to hurry up with the move,” he said. “We are well positioned to wait for more clarity,” he said of the administration's policies.
When asked at some point that the Fed's goal of achieving low, stable inflation and a healthy labor market would be tense with each other, Powell said it would be a “very challenging” situation, but not something that appears to be on the horizon.
“We don't have that situation right now,” he said. “It's not a place where the economy is at all, nor is it a place where forecasts are at all.”
Vincent Reinhart, a former Fed economist and now the chief economist at BNY Investments, warned that central bank policy choices will be “hard” based on his expectations that inflation could prove more meaningful than central banks currently anticipate.
Also on Wednesday, the Fed announced it would slow down its balance sheet cuts of around $6.8 trillion. This avoids amplifying the disruption that may arise in the funding market due to the ongoing coverage of the debt cap and avoids limiting the amount the government can borrow to fulfill its financial obligations. The Fed currently limits the amount of Treasury securities that allow it to deploy its balance sheets from $25 billion to $5 billion a month. It prevented the monthly cap from changing for mortgage-backed securities. Fed Governor Christopher Waller voted against the decision.
