Central bank says rate cuts still possible, but not guaranteed
The Federal Reserve maintained its benchmark interest rate at 4.25% to 4.50% for the second consecutive meeting on Wednesday, as officials weighed the risks of slowing economic growth against persistently high inflation.
Fed chair Jerome Powell emphasized the uncertainty surrounding the economic outlook, particularly in light of significant policy changes under President Donald Trump’s administration. While Powell reiterated that the central bank is in no rush to adjust borrowing costs, he acknowledged the challenges posed by shifting trade policies and their potential impact on inflation.
Subdued projections
Bloomberg reported that new economic projections from the Fed indicated slower growth expectations for 2025, alongside a higher inflation forecast. Policymakers raised their estimate for core inflation, which excludes volatile food and energy prices, to 2.8% by the end of the year—up from a previous forecast of 2.5%.
In contrast, growth projections for 2025 were revised downward to 1.7% from 2.1%. The unemployment rate is also expected to tick up slightly, reaching 4.4% by year-end compared to the previous estimate of 4.3%.
Powell acknowledged that while inflation has started to rise, a key factor appears to be the implementation of new tariffs. “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.”
Bloomberg noted that eight officials indicated they foresee only one or no rate reductions this year, denoting a degree of caution in the central bank’s approach.
Financial markets reacted positively to the Fed’s decision, with the S&P 500 rising and Treasury yields moving lower following Powell’s remarks.
Slowing balance sheet runoff
In addition to holding rates steady, the Fed announced a slowdown in its balance sheet reduction efforts. Starting in April, the central bank will lower the monthly cap on the amount of Treasuries maturing without reinvestment to $5 billion, down from $25 billion. The cap for mortgage-backed securities will remain unchanged at $35 billion.
Governor Christopher Waller dissented from this decision, preferring to hold rates steady. A Reuters report noted that the Fed had already begun easing the runoff in mid-2024, citing concerns over market liquidity and financial stability.
Powell reassured that while recession risks have risen, they remain moderate. He pointed to consumer sentiment data as a warning signal but underscored that economic activity has not yet shown significant signs of contraction.
“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.”
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