The members of the Board of Governors of the Federal Reserve System participate in the Federal Open Market Committee (FOMC) meeting held in Washington, D.C. on March 18-19, 2025, Photo courtesy of the Federal Reserve / Handout
The Federal Reserve kept its benchmark interest rate unchanged Wednesday and signaled that it still expects to cut rates twice this year even as it sees inflation staying stubbornly elevated.
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 forecasts growth falling to just 1.7 percent in 2025, down from 2.8 percent last year, and 1.8 percent in 2026. Policymakers also expect inflation will pick up slightly, to 2.7 percent by the end of this year from its current level of 2.5 percent. Both are above the central bank’s 2 percent target.
Even though the Fed maintained its forecast for two cuts, economists noted that under the surface there were signs that the central bank could stay on hold for some time. That is likely to keep borrowing costs for mortgages, auto loans, and credit cards unchanged in the coming months.
Eight of the 19 Fed officials said they see only one or zero rate reductions this year, up from just four in December.
“It will be harder for them to cut rates this year with inflation moving sideways,” said Michael Gapen, an economist at Morgan Stanley.
Fed Chair Jerome Powell, at a news conference, said that President Donald Trump’s tariffs have started to push up inflation and would likely stall the progress the central bank has seen in reducing inflation since its peak in 2022.
“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.”
Fed policymakers also expect the unemployment rate to tick higher, to 4.4 percent, by the end of this year, from 4.1 percent now.
The economic 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 percent 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.
“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.”
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, thus helping drive mortgage rates lower than they might otherwise be. 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.
AP staff writer Alex Veiga contributed to this report.
