The News
The US Federal Reserve held interest rates steady at their current 4.25-4.50% Wednesday, as the bank warned of increased economic uncertainty amid growing fears of tariff-fueled inflation.
Two future rate cuts are likely to come this year, according to the bank. The Fed also cut its growth projections for 2025, to 1.7%, down 0.4% from its last projection in December.
Speaking to press after the announcement, Fed Chair Jerome Powell said while some forecasters had raised the likelihood of a recession this year, “We don’t make such a forecast... it’s not high.” Powell also stressed that the economy is overall healthy, although he conceded that there is some sign that tariffs are already having an impact on inflation.
The full impact of US President Donald Trump’s trade policies are not yet clear: Stock markets have tumbled over the past few weeks — and especially after Trump refused to rule out a recession this year — while tariffs are expected to significantly raise consumer prices. Powell said that tariffs had factored into the decision to raise the inflation outlook, but that it remains unclear how great the effect of tariffs will be as opposed to other inflationary forces.
Stocks climbed higher immediately following the announcement.
SIGNALS
Tariffs could force the Fed to set aside its wait-and-see approach
The US central bank’s policy approach — which focuses on real-time headline data, as opposed to modeling for the future — could put it on the back foot amid rising economic uncertainty: “The promise of future tariffs essentially pushes aside [the Fed’s] goal of data dependency and means they’re going to have to rely more on a forecast framework,” an analyst told the Financial Times. February’s cooler-than-expected inflation figures — which analysts cautioned as largely predating the trade war — support the case for resuming cuts later this year, but escalating tariffs — which many economists say will boost inflation, raise unemployment, and slow economic growth — may not, Reuters noted.
Tariff impacts support opposing rate decisions
Trump’s trade war “puts the Fed between a rock and a hard place,” an economist told The Wall Street Journal: Interest rate cuts generally help to ease unemployment, but not inflation. The current round of expected tariffs is both larger in scope and set amid higher inflation than were Donald Trump’s first-term tariffs, which, at the time, prompted the Fed to lower rates pre-emptively to bolster growth, the paper noted. “Longer-run inflation expectations will prevent the [Fed] from responding aggressively to the softening in economic and labor conditions,” Barclays forecast in a note to clients. If the Fed does cut rates, it may be for ‘bad’ reasons — if tariffs and spending cuts hurt economic growth as opposed to inflation coming down, The Associated Press wrote.
Fed risks a battle with Donald Trump
The US Federal Reserve has set the country’s monetary policy without direct political interference since 1951, but Donald Trump has long sought to increase executive oversight over independent federal agencies, including the Fed, Politico reported. In February, Trump issued an executive order targeting the bank’s regulatory functions. While the bank’s top officials have become “deft” at dodging Trump-related questions and calls for action, The New York Times noted, tariff-fueled inflation “risks putting the central bank more squarely in the [president’s] cross hairs.”