Fed holds rates, sees slower growth and higher inflation

Federal Reserve officials held their benchmark interest rate steady for a second straight meeting, though they telegraphed expectations for slower economic growth and higher inflation.

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 begin slowing 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 President Donald 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.

“Uncertainty around the economic outlook has increased,” the committee said in a statement. Officials also removed prior language stating that risks to achieving their employment and inflation goals were roughly in balance.

New rate projections showed a narrow majority of Fed officials penciled in half a percentage point in rate cuts this year. That implies two quarter-point rate reductions, the same number as officials estimated when they last issued projections in December.

Fed Chair Jerome Powell is scheduled to hold a press conference at 2:30 p.m. in Washington. Investors, who widely expected the Fed to leave rates unchanged at this meeting, will listen for additional clues on how officials are factoring Trump’s policies into their outlook, and how they might respond should economic conditions deteriorate.

Growing Uncertainty

In their fresh economic forecasts, 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.

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.

Investors have also reacted negatively, 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 Wednesday it would slow the pace at which it’s shrinking its balance sheet. Beginning in April, the central bank will lower the monthly cap on the amount of Treasuries it will allow 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.