The United States Federal Reserve kept its benchmark interest rate unchanged Wednesday and signaled that it still expects to cut rates twice this year, though it said the outlook is more uncertain.
The Fed also now expects the economy to grow more slowly this year and next than it did three months ago, according to a set of quarterly economic projections also released Wednesday. It also expects the unemployment rate to tick higher, to 4.4 per cent, by the end of this year. Policymakers also expect inflation will pick up slightly this year, to 2.7 per cent from its current level of 2.5 per cent. Both are above the central bank’s two per cent target.
“Uncertainty around the economic outlook has increased,” the Fed said in a statement released after its two-day meeting.
The projections underscore the tight spot the Fed may find itself in this year: Higher inflation typically would lead the Fed to keep its key rate elevated, or even raise rates. On the other hand, slower growth and higher unemployment would often cause the Fed to cut rates to spur more borrowing and spending and lift the economy.
It is the second meeting in a row that the Fed has kept its interest rate at about 4.3 per cent as the central bank has moved to the sidelines as it evaluates the impact of the Trump administration’s policies on the economy. Economists forecast that tariffs will likely push up inflation, at least temporarily. But other policies, such as deregulation, could lower costs and cool inflation.
At a news conference, Chair Jerome Powell said that there were signs the tariffs imposed so far may have pushed up the cost of imported goods. Inflation had been heading back to the Fed’s two per cent goal, but that may now take longer with the tariffs, he said.
“I do think with the arrival of tariff inflation, further progress is probably delayed,” Powell said.
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Powell acknowledged that many surveys of businesses and consumers have showed rising concern about the economic outlook. Yet he noted that the unemployment rate remains low and the economy is still expanding.
“We do understand that sentiment has fallen off pretty sharply but economic activity has not yet,” Powell said. “The economy seems to be healthy.”
The Fed also said it would slow the rate at which it is reducing its Treasury holdings, which grew massively during and after the pandemic. Previously it had allowed $25 billion of Treasurys to mature each month without reinvesting the proceeds. Now it will allow only $5 billion to mature each month.
In effect, the Fed will be reinvesting more of the expiring bonds into new securities, which should keep interest rates on long-term Treasurys lower than they would have been otherwise. Powell characterized the change as a technical one and not related to its interest-rate policies. Yields fell slightly in Treasury markets.
Federal Reserve governor Christopher Waller voted against the decision to slow the Treasury purchases. The Fed is still allowing $35 billion of mortgage-backed securities to mature each month.
So far, growth appears to be slowing in the first three months of the year but the impact of tariffs on inflation hasn’t yet materialized. But economists at Goldman Sachs forecast that the import taxes will push inflation to three per cent by the end of this year.
Fed officials are closely watching measures of Americans’ inflation expectations, which spiked in one survey released just last week. Inflation expectations — essentially a measure of how worried people are that inflation will get worse — are important to the Fed because they can be self-fulfilling. If people expect higher inflation, they may take steps, such as accelerating purchases, that can push prices higher.
Retailers of both high-end and lower-cost goods have warned that consumers are turning more cautious as they expect prices to rise because of tariffs. Retail sales rose modestly last month after a sharp fall in January. Homebuilders and contractors expect that home construction and renovations will get more expensive.
Many economists have sharply reduced their forecasts for growth this year, with Barclays, a bank, now forecasting growth of just 0.7 per cent, down from 2.5 per cent in 2024. And economists at Goldman Sachs now expect inflation — excluding the volatile food and energy categories — will tick higher to three per cent by the end of this year, up from its current level of 2.6 per cent.
© 2025 The Canadian Press
