Investing.com - The Federal Reserve left interest rates unchanged Wednesday and flagged that it will take a wait-and-see approach to further policy decisions due to lingering uncertainty around the impact of U.S. President Donald Trump’s tariff plans on inflation and growth.
The rate-setting Federal Open Market Committee, the FOMC, kept its benchmark rate steady for a third-straight meeting at a range of 4.25% to 4.5%.
Fed members see the benchmark rate falling to 3.9% this year, suggesting two rate cuts, matching the prior forecast in December. The rate-cut outlook for 2026 and 2027 were also unaltered at 3.4% and 3.1%, respectively.
The Fed’s unchanged outlook on rates comes as inflation is expected to remain higher this year and economic growth is tipped to be softer over the next few years.
The core personal consumption expenditures price index, the Fed’s preferred inflation forecast, is now projected to be 2.8% in 2025, up from a prior forecast in December of 2.5%. For 2026, inflation is estimated to be 2.2%, up from 2.1% previously, and slowing further to the 2% target by 2027, unchanged from the prior forecast.
“Inflation has started to move up,” Fed Chair Jerome Powell said, warning that “there may be a delay in further progress over the course of this year.”
Still, the Fed chose not to price in a prolonged surge in prices or a slowdown in growth, with Powell stressed that the possible outcome of Trump’s tariffs remains murky.
"[Powell] largely downplayed concerns about inflation and rising inflation expectations, but was quick to say the Fed could either remain on hold or reduce rates," analysts at Morgan Stanley said in a note to clients.
Economic growth is seen falling to 1.7% this year, compared to a prior forecast of 2.1%. For 2026 and 2027, growth is likely to ease further to 1.8%, versus previous estimates of 2% and 1.9%, respectively.
During a post-decision press conference, Powell highlighted particular risks around so-called "stagflation" due to policy changes out of Washington, according to analysts at BofA. Stagflation refers to a period of weak economic activity that is combined with elevated inflation and higher unemployment.
The unemployment rate is expected to average a pace of 4.4% in 2025, from a prior estimate of 4.3%, and fall to 4.3% in 2026 and 2027, unchanged from prior estimates of 4.3%.
Meanwhile, the Fed also moved to slow down the pace of a drive to shrink the size of its balance sheet, which analysts interpreted as a sign that the central bank is keen to maintain market stability.
The main stock averages on Wall Street rose following the decision, as traders lifted their bets for Fed interest rate cuts this year. Investors are now pricing in 68 basis points worth of reductions, up from 56 basis points — or about two quarter-point drawdowns — ahead of the Fed’s announcement.
However, stocks have yet to claw back recent losses that were sparked by Trump’s tariff threats. The S&P 500 has shed 8% over the past month, and has erased all the gains it notched shortly after Trump was elected to a second term in the White House in November.
(Yasin Ebrahim contributed reporting.)