US Fed holds interest rates again but still sees two cuts coming in 2025

WASHINGTON – The US Federal Reserve left interest rates unchanged on March 19 for a second straight meeting, as officials stuck to their previous forecast for two more cuts in 2025 despite bracing for higher inflation and slower growth.

Economic projections the central bank released on March 19 indicate that while officials see inflation moving up in 2025 more rapidly than previously expected, they also expect the trend to be transitory.

At his post-meeting news conference, Fed chairman Jerome Powell said the current outlook is that any price jumps from tariffs likely will be short-lived.

“It can be the case that it’s appropriate sometimes to look through inflation, if it’s going to go away quickly, without action by us, if it’s transitory,” Mr Powell added. “That can be the case in the case of tariff inflation. I think that would depend on the tariff inflation moving through fairly quickly and, critically, as well on inflation expectations being well anchored.”

US stocks rallied in response, with the S&P 500 clawing back more of the rout since late February that took the benchmark briefly into correction territory.

The blue-chip Dow Jones Industrial Average climbed 383.32 points, or 0.93 per cent, the S&P 500 jumped 1.08 per cent while the tech-heavy Nasdaq Composite advanced 1.41 per cent.

“The market will read this as dovish at the margin, with the Fed not overtly concerned with the economy or inflation. Stocks and bonds rejoice,” said Mr Christian Hoffmann at Thornburg Investment Management. 

The central bank’s decision to hold interest rates at 4.25 per cent to 4.5 per cent extends a pause that has been in place since January following a series of cuts in late 2024 that lowered borrowing costs by 1 percentage point.

The Fed voted at an highly uncertain moment for the US economy amid an onslaught of policy changes from President Donald Trump since he returned to the White House in January. The upheaval has created complications for the central bank, which is still struggling to stamp out stubbornly high inflation and now must contend with a drastically different set of circumstances as it tries to finish off the job without harming what still appears to be a solid labour market.

In a statement on March19, the Fed noted that “uncertainty around the economic outlook has increased” even as it maintained a positive tone about the state of the economy. It said that economic activity continued to expand at a “solid pace” as the unemployment rate “stabilised at a low level”. Inflation, meanwhile, was “somewhat elevated”.

Officials also shared a new set of economic projections capturing their most comprehensive analysis yet of how their outlook has evolved now that Mr Trump has begun to implement his economic agenda.

Most officials still expect interest rates to decline in 2025 to 3.75 per cent to 4 per cent, as was the case when projections were last published in December. But eight policymakers forecast either no additional cuts or just one. Only two thought the Fed would lower rates by 0.75 percentage points, or deliver three quarter-point reductions in 2025.

By the end of 2026, most officials expect interest rates to decline by another half a percentage point to 3.25 per cent to 3.5 per cent before falling to around 3 per cent in 2027.

Slowing economy

Fed officials now see the economy growing only 1.7 per cent in 2025, compared with their initial expectation for a 2.1 per cent expansion, and predict the unemployment rate to rise to 4.4 per cent. Officials also lifted their forecasts for core inflation, which strips out volatile food and energy prices, to 2.8 per cent. Back in December, they expected it to end the year at 2.5 per cent, already a big step up from earlier estimates.

Underlying these forecasts is a significant degree of uncertainty about how exactly Mr Trump’s policies will take shape and how businesses and consumers will respond. Those unknowns have reinforced the Fed’s approach to stand pat for the moment. To lower interest rates again, it wants to see either more tangible evidence that inflation is indeed back on track to its 2 per cent target or signs that the economy is starting to deteriorate sharply.

One of the biggest wild cards is tariffs, which Mr Trump has threatened on a scale beyond what many economists and policymakers initially expected. After much flip-flopping, levies on certain imports from Canada, Mexico and China are now in place, along with all foreign steel and aluminium that comes into the United States.

Mr Trump and his advisers are now working on so-called reciprocal tariffs, which are due to be announced on April 2 and aim to match the tariffs that other countries charge on US exports, while also factoring in other penalties such as taxes and currency manipulation.

The fear is that these policies, coupled with Mr Trump’s efforts to slash government spending and deport immigrants, will not only intensify already sticky price pressures but also knock what has been a remarkably resilient economy off course. Taxes and deregulatory measures could help to prop up growth to some extent, which is why the Fed is primarily focused on the net effect of the government’s agenda.

Survey data suggests that Americans have already begun to sour on the outlook while also building in higher expectations about inflation, however. In a notable shift, Mr Trump and his advisers have repeatedly refused to rule out a recession, an admission that has jolted financial markets. They have also warned that consumer prices may rise temporarily. That combination would put the Fed in an even more difficult position, given its mandate to keep inflation low and stable and the labour market healthy.

Recession risk up

“Fed officials want to be careful not to overreact,” Nationwide chief economist Kathy Bostjancic said ahead of the rate decision, adding she expects the Fed to ultimately make just one rate cut in 2025.

Speaking to reporters on March 19, Mr Powell said the risk of recession had risen slightly in recent weeks.

“If you go back two months, people were saying that the likelihood of a recession was extremely low,” he added. “So it has moved up but it’s not high.”

While Fed officials have sought to avoid criticising the new administration, some outside analysts have been less restrained.

“Trump’s management of economic policy has been a disaster,” Mr Michael Strain, director of economic policy studies at the conservative American Enterprise Institute, wrote in a recent blog post. NYTIMES, AFP, BLOOMBERG