Federal Reserve Maintains Interest Rates, Forecasts Slower Economic Growth

The Federal Reserve decided to keep its benchmark interest rate steady on Wednesday while reaffirming its expectation of two rate cuts later this year, despite persistent inflationary pressures.

Alongside its rate decision, the Fed released updated quarterly economic projections indicating slower economic growth for both this year and next. The central bank now anticipates growth to decline to 1.7% in 2025, down from 2.8% in the previous year, and 1.8% in 2026. Additionally, policymakers forecast a slight uptick in inflation, reaching 2.7% by the end of this year—above the Fed’s 2% target.

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Although the Fed maintained its projection for two rate cuts, some analysts noted underlying signals that could suggest a prolonged pause. This could mean that borrowing costs for mortgages, auto loans, and credit cards will remain steady in the near term.

Notably, eight out of the 19 Fed officials now anticipate either one or no rate cuts in 2024, an increase from four officials holding that stance in December.

Michael Gapen, an economist at Morgan Stanley, commented that "it will be harder for them to cut rates this year with inflation moving sideways."

During a press conference, Fed Chair Jerome Powell acknowledged that tariffs implemented by former President Donald Trump have begun contributing to inflation, potentially slowing the Fed’s progress in bringing inflation down from its 2022 peak.

"I think we were getting closer and closer" to price stability, Powell said. "I wouldn’t say we were at that… I do think with the arrival of the tariff inflation, further progress may be delayed."

Following Powell’s remarks, Trump took to Truth Social on Wednesday, urging the Fed to lower rates. He wrote, “The Fed would be MUCH better off CUTTING RATES as U.S. Tariffs start to transition (ease!) their way into the economy. Do the right thing.”

Powell reassured that the Fed still expects inflation to approach its 2% target by late 2025. He suggested that tariffs might lead to a temporary spike in prices rather than sustained inflationary pressure. In such cases, the Fed may choose to “look through” short-term price increases rather than react with higher interest rates.

Investors responded positively to Powell’s comments, leading the S&P 500 index to rise by 1% on Wednesday afternoon.

Luke Tilley, Wilmington Trust’s chief economist, noted that Powell’s stance on tariffs appeared less concerning than during the Fed’s previous meeting in January. “They’re talking about tariffs in a totally different way,” he observed.

Powell admitted that the Fed initially underestimated the persistence of inflation following the pandemic, which delayed its response in raising interest rates. However, he emphasized that the current situation could be different.

"But… we really can’t know that," he added, acknowledging the uncertainty surrounding the economic outlook. “We’re going to have to see how things actually work out.”

Fed officials also project a slight rise in the unemployment rate, from 4.1% currently to 4.4% by year-end.

The updated economic forecasts highlight the challenges facing the Fed this year. While higher inflation would typically prompt the Fed to maintain or raise interest rates, slowing growth and rising unemployment could justify rate cuts to stimulate borrowing and spending.

For the second consecutive meeting, the Fed has held interest rates at approximately 4.3%, opting to assess the economic effects of Trump’s policies. Economists predict that while tariffs could temporarily drive inflation higher, other policies, such as deregulation, may counteract this by lowering costs.

Powell acknowledged that both business and consumer surveys indicate growing concerns about the economic outlook. However, he pointed out that key indicators, such as employment and economic expansion, remain robust.

“We do understand that sentiment has fallen off pretty sharply but economic activity has not yet,” Powell noted. “The economy seems to be healthy.”

He also emphasized that uncertainty surrounding the economy is “unusually elevated,” suggesting that the Fed is in no rush to make further moves.

“We’re not going to be in any hurry to move,” Powell said. “We’re well positioned to wait for further clarity and not in any hurry.”

Additionally, the Fed announced plans to slow the reduction of its Treasury holdings, which expanded significantly during the pandemic. Previously, $25 billion worth of Treasuries matured each month without reinvestment; this amount has now been reduced to $5 billion.

By reinvesting more of its maturing bonds, the Fed aims to help keep long-term interest rates lower. Powell described the adjustment as a technical measure unrelated to interest rate policy. Following the announcement, Treasury yields declined slightly.

Federal Reserve governor Christopher Waller opposed the decision to slow the reduction of Treasury holdings. Meanwhile, the Fed continues allowing $35 billion in mortgage-backed securities to mature each month.

Broader Economic Implications

While the Fed’s cautious approach suggests stability, some economists warn that prolonged high interest rates could put pressure on businesses and consumers. Higher borrowing costs may deter companies from expanding, hiring, or investing in new projects. Similarly, households burdened with elevated credit card and mortgage rates may cut back on discretionary spending, which could lead to slower overall economic growth.

Retailers have already begun to see signs of consumer hesitation. Many businesses, from luxury brands to discount chains, report that customers are becoming more price-sensitive, especially as tariffs push prices higher. Industries reliant on imported goods, such as electronics and automobiles, could see sharper price increases, further dampening demand.

The housing market remains another key area of concern. Elevated mortgage rates have kept home affordability low, discouraging buyers and slowing new home construction. Homebuilders warn that increased material costs, partially due to tariffs, may drive prices even higher, making it difficult for many Americans to enter the housing market.

Despite these challenges, Powell remains optimistic that the economy is not heading for a downturn. He reiterated that while inflation remains slightly above the Fed’s target, it has come down significantly from its peak, and the labor market is still strong. The Fed’s approach, he emphasized, will be guided by incoming data, and officials will be patient in deciding when to adjust rates.

As 2024 progresses, the central bank’s balancing act will become increasingly delicate. If inflation remains sticky while economic growth slows, the Fed may be forced to rethink its stance on rate cuts. Conversely, if inflation continues its gradual decline, rate cuts could come sooner than expected, providing some relief to businesses and consumers alike.

For now, the Fed is signaling that it will continue monitoring economic trends, prepared to adjust its strategy based on evolving conditions. The coming months will be critical in determining the direction of interest rates and their broader impact on the U.S. economy.