Fed leaves rates unchanged, notes higher uncertainty
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The Federal Reserve building in Washington, DC. Photo: Alex Wong/Getty Images.
The Federal Reserve left interest rates unchanged Wednesday while noting increased economic uncertainty and slashing growth forecasts, at a time when trade and other policy areas are in extreme flux.
Why it matters: With the economy showing pockets of weakness, the Fed is opting for a cautious approach, even as its leaders see risks ahead from a volatile policy environment.
Driving the news: The policy-setting Federal Open Market Committee left its federal funds rate target range at 4.25% to 4.5%, where it has been since December.
- "Uncertainty around the economic outlook has increased," the committee said in language newly added to its policy statement.
- The median Fed official now anticipates 1.7% GDP growth this year, compared with 2.1% in December projections.
- The median Fed official anticipates two interest rate cuts this year, the same as in December.
Between the lines: Fed officials have acknowledged the Trump administration's broad set of policy changes — including tariffs, federal government cutbacks, deregulation, and restrictive immigration policy — will likely affect the economy.
- But given deep uncertainty on how all those forces will net out in affecting the job market and inflation, the central bank's leaders have opted for a wait-and-see stance.
What they're saying: "It is going to be difficult to have a precise assessment of how much inflation is coming from tariffs," Fed chair Jerome Powell told reporters.
- Powell flagged upward pressure on goods prices in the previous two months, noting that "clearly a good part of it is coming from tariffs."
- The Fed chair later added it's likely that "progress is delayed for the time being," though he emphasized that the base case is that the effect from tariffs will ultimately be transitory.
The big picture: The Fed's decision comes as a variety of survey-based indicators have pointed to incipient weakness in the economy, though broad measures like the unemployment rate have held up fine.
- Powell did not dismiss those indicators, but noted that "the relationship between survey data and actual economic activity hasn't been very tight."
- "There are times when people have been very downbeat about the economy and then gone out and bought a new car," Powell added.
By the numbers: New economic projections reflect heightened worry on both growth and inflation. In addition to downgrading their GDP forecasts, the median official now sees inflation of 2.7% this year, up from 2.5% in December.
- The median official saw the unemployment rate ticking up to 4.4% by year-end, compared to 4.3% in December.
The intrigue: The committee also announced that starting next month it will withdraw its pandemic-era support for the financial system more slowly than it has been.
- Under the change to its "quantitative tightening" the Fed will allow the portfolio of Treasury securities on its balance sheet to fall by only $5 billion a month, not the current $25 billion.
- That translates into a slight easing of the Fed's monetary policy stance – and is good news for longer-term borrowing costs and the value of financial assets.
- Governor Christopher Waller dissented from the change to balance sheet policy, while agreeing with leaving interest rates unchanged. It is only the second time a governor has dissented from a monetary policy action in the last two decades.
This story has been updated with comments by Fed chair Powell.
