(Bloomberg) — Federal Reserve officials held their benchmark interest rate steady for a second straight meeting, caught between mounting concerns that the economy is slowing and inflation could remain stubbornly high.
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Chair Jerome Powell acknowledged the high degree of uncertainty from President Donald Trump’s significant policy changes, but repeated the central bank is not in a hurry to adjust borrowing costs. He said officials can wait for greater clarity on the impact of those policies on the economy before acting.
The Federal Open Market Committee voted on Wednesday to keep the benchmark federal funds rate in a range of 4.25%-4.5%, and said it would further slow the pace at which it is reducing its balance sheet. Governor Christopher Waller, who supported holding rates steady, dissented from the decision over the balance sheet move.
The decision to hold rates steady comes as Trump’s ambitious and frequently erratic policy agenda has placed the economy, and the Fed’s ability to keep it on track, under increasing pressure. Trump’s ever-changing plans to levy tariffs on US trading partners have stoked fears of an economic slowdown and raised fresh worries over inflation — a combination that could pull policymakers in opposite directions.
“Inflation has started to move up,” Powell said, “we think partly in response to tariffs. And there may be a delay in further progress over the course of this year.”
Powell said his base case is that any tariff-driven bump in inflation will be “transitory,” but later added it will be very challenging to say with confidence how much inflation stems from tariffs versus other factors.
The S&P 500 moved higher as Powell spoke, and Treasury yields moved lower.
Updated Projections
New economic projections showed Fed officials marked down their forecasts for growth this year, while boosting estimates of inflation. It also showed officials continued to pencil in a half percentage point of rate cuts this year, according to the median estimate, implying two quarter-point rate reductions.
That said, eight officials saw one reduction or fewer this year, underscoring policymakers’ resolve — at least for now — to suppress inflation even if growth slows.
Powell said the outlook for monetary policy didn’t change because the forecasts for lower growth and higher inflation balance each other out.
The Dot Plot, Explained: Understanding How the Fed Forecasts
“Uncertainty around the economic outlook has increased,” the committee said in a post-meeting statement. Officials also removed prior language stating that risks to achieving their employment and inflation goals were roughly in balance.
Officials raised the median estimate for so-called core inflation, which strips out volatile food and energy prices, at the end of this year to 2.8% from 2.5%. Their outlook for 2025 economic growth cooled to 1.7% from 2.1%.
They raised their estimate for unemployment to 4.4% by the end of this year, from the 4.3% they saw in December.
Changing Picture
Fed officials have kept rates steady this year after cutting them by a percentage point in the closing months of 2024. Since December, they’ve signaled a desire to see more progress on inflation, and more clarity on the impact of Trump’s policies, before they consider another move.
In that time, inflation has remained elevated while consumers’ expectations for future price growth have climbed amid an escalating trade war. Spending has softened, and consumer confidence has deteriorated sharply.
Powell said recession odds have moved up, but are not high. He pointed to so-called soft data specifically, like sentiment, as flashing concern, but underscored the Fed’s emphasis is on hard data. He pushed back against data from the University of Michigan showing a sharp increase in long-term inflation expectations, calling it an “outlier.”
“We do understand that sentiment has fallen off pretty sharply, but economic activity has not yet and so we are watching carefully,” Powell said. “I would tell people the economy seems to be healthy.”
Investors have reacted negatively to the mounting trade war and concerns about the growth outlook, with the S&P 500 falling more than 10% from mid-February before paring some of those losses.
The Trump administration has done little to ease recession fears, with the president saying on March 9 the US economy faces a “period of transition.” Treasury Secretary Scott Bessent has said the US economy and financial markets were in need of a “detox.”
Balance Sheet
The Fed also said that, beginning in April, it will lower the monthly cap on the amount of Treasuries on its balance sheet that it allows to mature without being reinvested, to $5 billion from $25 billion. It will leave the cap on mortgage-backed securities unchanged at $35 billion. Waller preferred to continue the current pace.
Various officials noted during the committee’s January meeting that it might be appropriate to consider pausing or slowing the Fed’s balance-sheet runoff until the federal government is no longer up against the debt ceiling, the statutory limit for outstanding Treasury debt. The US hit that limit in January.
The Fed first started slowing the pace at which it shrinks its portfolio of assets in June — a bid to ease potential strain on money market rates.
–With assistance from Jonnelle Marte, Matthew Boesler, Vince Golle, Liz Capo McCormick, Laura Curtis and Craig Torres.
(Adds additional comments from Powell beginning in tenth paragraph.)
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