The Federal Reserve said Wednesday it hadn’t changed interest rates, but warned of growing uncertainty about the direction of the economy due to President Donald Trump’s tariff agenda.
The Fed said the main federal funding rate, which serves as a benchmark for interest rates across the economy, remains at around 4.5%.
The current economic situation is said to be strong, but the central bank has lowered its gross domestic product forecast. This reduced the total value measure of all goods and services produced in the United States to 1.7% for the remaining year, from 2.1% in December. He also warned that an important measure of inflation is now closer to 3% than 2%.
Currently, 18 of the 19 policymakers say they are at a higher risk of a decline in GDP compared to just five in December. Meanwhile, 11 policymakers say unemployment could rise to up to 4.5% this year from the previous five.
“Uncertainty regarding the economic outlook is on the rise,” the Fed statement said.
At a press conference after the statement was released, Fed Chair Jerome Powell said the dynamics between Trump’s tariffs and stronger short-term price growth are not entirely clear given other trends in the economy. But tariffs are certainly a factor in growing expectations that price hikes will accelerate, he said.
“Inflation is starting to rise now and we believe that in part, in response to tariffs, further progress may be delayed over the course of the year,” he said.
Stocks have skyrocketed in the news, but bond purchases have also increased, the latter reflecting concerns about the growth outlook. Investors look for bonds if they believe they can earn better returns than other assets.
“The Fed is as lost in the wilderness as others are trying to decipher the ongoing changes in economic policy from 1600 Pennsylvania Avenue,” Omea Sharif, managing director of the Inflation Insights consulting firm, said in a note to clients following Wednesday’s rate decision.
Many indicators suggest that consumer spending and employer employment are slowing, not to mention comments from Trump administration officials themselves. After the initial explosion of optimism during Trump’s election, growth now appears to be more subdued. Meanwhile, Elon Musk’s government efficiency cuts to the federal workforce raised concerns about pressure on the local economy, not to mention the ability of newly unemployed workers to receive unemployment assistance.
The fact that it is clearing up policy changes in the White House is already unsettling. Last week, the S&P 500 slipped into the revised area, showing a 10% drop from its latest peak for the first time in three years.
As research suggests that consumers and businesses are losing credibility, Trump and senior officials have changed their message since the campaign, warning consumers under the guise of potential economic pain and refuse to rule out the possibility of a recession. Trump has shown that the economy could be during a period of “transition” as his policies take effect, but Treasury Secretary Scott Bescent recently said the US must “detoxify” from its dependence on public spending.
The drastic change created new challenges for the Fed to navigate in order to set borrowing rates. It is being accused by Congress of helping to keep unemployment and inflation low. Both are now quite calm. However, several analysts said Wednesday that the Fed’s latest outlook shows a higher inflation outlook despite a significant lack of shock caused by the oil crisis in the 1970s, despite lower overall growth (although higher overall growth rates).
“The revision of the forecast (the policymakers) had a somewhat “stud” feeling, with a forecast that growth and inflation would move in the opposite direction,” Goldman Sachs managing director Whitney Watson said in a memo Wednesday afternoon. “For the time being, the Fed will be waiting and we can see the modes as we are monitoring whether the recent slowdown in growth will develop into something more severe.”
It elicited multiple interpretations among analysts looking for signs of federal thinking.
Sheemashha, chief global strategist at Principal Asset Management, said the revised forecast indicates that the Fed may soon begin to start paying close attention to the labor market. Fed policymakers said, “We still show that we expect fee cuts will be needed in the near future.
In contrast, Sharif said insights insights in inflation insights was foreseen two interest rate cuts this year, suggesting a more “hawkish” stance as it focuses on keeping price growth rather than curbing unemployment.
He said the situation is reminiscent of 2022, but the Fed decided not to signal interest rate cuts as inflation rose.
“The Fed saw the negative side risk to growth and the upside-down risk to unemployment, but they continued to move forward with hiking rates,” Sharif said of the policymakers’ approach at the time. “They are saying now that they’re making a mistake on the side that makes sure inflation is out of control again.”
