The Federal Reserve left its key interest rate steady on Wednesday and reaffirmed that it now sees two rate cuts this year. Officials did, however, accept rising economic uncertainty as inflation rises and growth eases.
In its quarterly economic forecasts, the Fed lowered this year’s growth forecast and that of next year while expecting the unemployment rate to rise to 4.4% by year-end. It also expects inflation to increase moderately to 2.7%, higher than the central bank target of 2%.
The economic outlook is more uncertain,” the Fed said after its two-day policy session. This puts the central bank in a sensitive position: increasing inflation generally justifies keeping interest rates steady or increasing them, while slowing growth and increasing joblessness tend to lead to rate cuts to revive the economy.
This is the second straight meeting in which the Fed has left rates at around 4.3%. Officials are carefully weighing the impact of policies of the Trump administration, including tariffs, which economists expect will rise temporarily to boost inflation. In contrast, deregulation steps could reduce costs and alleviate inflationary pressures.
Moreover, the Fed stated it would ease the speed at which it would roll over its Treasury holdings, only allowing $5 billion to mature every month instead of $25 billion. This will tend to support long-term interest rates at a lower level. Treasury yields moved lower in response.
Goldman Sachs economists forecast tariffs may lift inflation to 3% by the end of the year. Consumer attitudes are also changing, with retailers reporting that consumers are more cautious. Barclays has dramatically cut its growth forecast for the US to only 0.7%, down from 2.5% last year.
While inflation expectations rise, the Fed keeps a keen eye, seeking to manage prices without sacrificing economic stability.
