The Federal Reserve has announced that it will keep the federal funds rate unchanged, maintaining the target range at 4.25% to 4.5%. This decision reflects heightened economic uncertainty and revised projections indicating slower growth and higher inflation.
The Federal Open Market Committee (FOMC) has updated its economic forecasts, now anticipating real GDP growth of 1.7% for 2025, a decrease from the previous estimate of 2.1%. Inflation expectations have been adjusted upward to 2.7%, up from the earlier projection of 2.5%. These revisions are attributed to recent policy changes, including the implementation of extensive import tariffs by the Trump administration, which are contributing to higher inflation and uncertainty.
Despite the current economic landscape, the Fed has signalled the possibility of two interest rate cuts by the end of the year.
However, Federal Reserve Chair Jerome Powell emphasised a cautious approach, stating that the central bank is “well positioned to wait for further clarity and not in any hurry” to adjust rates.
This stance reflects the Fed’s commitment to closely monitor incoming data and the evolving economic outlook before making further monetary policy decisions.
Following the Fed’s announcement, US stock markets responded positively. The S&P 500 and Dow Jones Industrial Average both rose by approximately 1.1%, while the Nasdaq Composite gained 1.4%. Investors appeared to be reassured by the Fed’s measured approach to monetary policy amid the current economic uncertainties.
George Lagarias, Chief Economist at Forvis Mazars, commented on the situation: “The price of uncertainty is becoming all too tangible for investors and consumers. And US policy spillovers appear unavoidable.
“The Fed keeping rates, reducing the pace of quantitative tightening and signalling two cuts until the end of the year was all too expected. What is important is its outlook, which suggests less US growth and yet more inflation as a result of Washington’s new economic policies. Consumers and investors who were hoping for a quick de-escalation of rates in 2025 are now faced with a new economic reality of high interest payments against a backdrop of lower real growth. And central banks across Europe, which may see even weaker growth and lower inflation are now also faced with a dilemma: will they follow the US central bank in keeping rates higher, or will they desynchronise and risk capital outflows?”
Abbas Owainati, Head of Asset Allocation at Charles Stanley, commented: “It’s not inconceivable for the Fed to ‘stay put’ through 2025 as uncertainty around tariffs adds to already elevated inflationary pressures, all whilst inflation expectations rise beyond anything we’d previously seen through the pandemic. In our view, stating long term inflation expectations are well anchored is at odds with the data.
“The Federal Reserve will want to preserve its credibility and remain data dependent despite Trump lobbying for rate cuts.”
