The Federal Reserve (Fed) held interest rates steady as central bank officials weighed the impact of President Donald Trump's aggressive economic agenda. This decision indicates that the Fed is awaiting evidence of inflation reaching its 2% target or a greater-than-expected economic slowdown. Either scenario could bring interest rate cuts back onto the agenda, influencing future monetary policy.
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03-20, 2025According to the latest economic projections released on Wednesday, officials still expect to cut borrowing costs twice this year. However, eight officials are now forecasting one or no rate cuts this year, compared to only four officials holding that view in December. This reflects a divergence in officials' views on the economic outlook, highlighting uncertainty within the Fed.
Federal Reserve Chairman Jerome Powell acknowledged at a post-meeting press conference that there is a high degree of uncertainty among U.S. consumers and businesses, much of which stems from the Trump administration's "turbulence." Powell stated, "How these developments will affect future spending and investment remains to be seen," emphasizing the need for careful observation.
The Fed's key borrowing rate remains in a range of 4.25% to 4.5%. Holding interest rates steady also allows policymakers to observe how a series of policy changes by the Trump administration will ultimately affect the U.S. economy. These policy changes include high tariffs, mass deportations, and federal government layoffs, all of which have potential economic consequences.
In recent speeches, officials have stated that they are willing to adjust interest rates in either direction, depending on how economic data performs. The Fed's latest pause marks the central bank's second consecutive hold on borrowing costs. Fed policymakers also anticipate a weaker economy this year than previously expected, while simultaneously projecting higher inflation this year, creating a complex economic picture.
In short, as the Trump administration embarks on structural reforms, Fed officials believe the U.S. economy is heading in the direction of "stagflation," a worrying phenomenon of slow or negative economic growth coupled with accelerating inflation. Whether the U.S. economy will ultimately descend into a full-blown period of stagflation remains to be seen; the last time this occurred was in the 1970s, a period of significant economic hardship.
The 12 voting members of the Federal Open Market Committee unanimously voted in favor of Wednesday's decision to hold interest rates steady, but Fed Governor Christopher Waller dissented against the decision to slow the pace of securities sales on the central bank's balance sheet. This disagreement underscores the ongoing debate within the Fed regarding balance sheet management.
Trump's policies remain a huge uncertainty for the Fed, as they could have a wide range of impacts on the economy. As expected, Powell was bombarded by reporters' questions about how the Fed is assessing the Trump policy changes, and he said it remains an evolving situation with many unknowns, requiring continuous monitoring and adaptation.
Trump's tariffs threaten higher inflation and weaker growth, his administration's crackdown on immigration could lead to labor shortages in certain industries, and his mass firing of federal workers could plunge some local economies into recession, but his deregulation efforts and extension of the 2017 tax cuts could boost growth. All told, it is unclear what the "net effect" of Trump's policies will be on the U.S. economy, as measured by growth, inflation, and the labor market, creating a complex and unpredictable economic landscape.
Powell said Trump's tariffs are one factor leading officials to raise their inflation forecasts for this year, but he noted that it is difficult to measure how much of the higher inflation expected this year is due to Trump's trade war. Earlier this month, Powell said officials would be guided by what economic statistics ultimately show, rather than by forecasts. The Fed leader said the data shows "some slowing in consumer spending," indicating a potential shift in economic momentum.
While U.S. consumers may ultimately be pulling back somewhat, the U.S. labor market remains a solid pillar of the economy. In February, the unemployment rate remained at a low of 4.1%, and employers added a healthy 151,000 jobs. And initial jobless claims, often an early indicator of any changes in the labor market, remain at historically low levels, suggesting continued strength in the job market.
Indeed, Powell noted that the resilience of the job market is a key bright spot in the U.S. economy, adding that any unexpected weakness could force central bank officials to resume cutting interest rates more quickly. "The labor market is in good shape," Powell said. When asked to assess the odds of a recession, which some economists have said have risen in recent weeks, Powell said those odds have not risen to alarming levels, providing some reassurance about the overall economic outlook.
Powell said, "Forecasters generally have raised—many of them have raised their forecasts of the probability of a recession. But it's still at relatively moderate levels. If you go back two months, people would have said the probability of a recession was extremely low. So it's moved, but it's not high," suggesting a cautious but not overly pessimistic view of the economic future.
Powell said so-called "hard data" capturing actual economic activity remains solid, but Trump's agenda has clearly shown up in various sentiment surveys or "soft data." Regarding the question of worsening sentiment about the U.S. economy, Powell said it is not yet clear how this will affect spending, which accounts for 70% of the U.S. economy, emphasizing the importance of monitoring consumer behavior.
He said, "The relationship between survey data and economic activity has not always been that tight. Sometimes people say a lot of pessimistic things about the economy and then go out and buy a new car," highlighting the potential disconnect between sentiment and actual economic behavior.
Not only are U.S. businesses and consumers becoming more pessimistic about the economy, but they also expect inflation to gradually rise and remain high in the coming years, according to the University of Michigan's latest consumer survey. If long-term inflation expectations continue to climb, this could force the Fed to consider raising interest rates. According to a declassified document detailing policy options, the "Tealbook," rising inflation expectations were a key factor cited by Fed officials during Trump's first trade war in 2018 that would force them to consider raising interest rates, demonstrating the potential impact of inflation expectations on monetary policy decisions.
