By Christopher Lugerber, Economics writer for the Associated Press
WASHINGTON (AP) — The Federal Reserve holds benchmark interest rates on Wednesday, indicating it expects to cut interest rates twice this year, even if inflation is seen as stubbornly rising.
The Fed also expects this year and the next economy to grow more slowly than it was three months ago, according to a set of quarterly economic forecasts released on Wednesday. Growth fell from 2.8% last year to just 1.7% in 2025, down from 1.8% in 2026. Policymakers expect inflation to rise slightly by the end of the year, starting from the current level of 2.5%. Both exceed the central bank’s 2% target.
The Fed had maintained forecasts for two cuts, but economists noted that there are signs beneath the surface that the central bank could be held up for a while. This could potentially maintain the cost of mortgages, car loans and credit card borrowing in the coming months.
Eight of the 19 Fed officials said they have seen zero rate cuts this year from just four in December.
“If inflation moves sideways this year, it’s going to be difficult for them to cut prices this year,” said Michael Gagun, an economist at Morgan Stanley.
At a press conference, Federal Reserve Chairman Jerome Powell said that President Donald Trump’s tariffs will begin to push up inflation and will likely halt the progress central bank has seen in reducing inflation since its peak in 2022.
“I think we were getting closer and closer,” Powell said, approaching price stability. “I’m not saying we’re in it. …I think the arrival of tariff inflation could delay further progress.”
On his true social platform later Wednesday, Trump said:
Powell added that the Fed still expects inflation to return to near 2% by the end of next year. Tariffs could cause a one-off rise in prices rather than a continuous boost to inflation, he said. And in some cases, the Fed can simply “examine” temporary price increases rather than responding by increasing prices, Powell added.
These comments seemed to please investors, with the S&P 500 stock index rising 1% on Wednesday afternoon.
Luke Tilly, chief economist at the Wilmington Trust, said Powell appears to be less wary of the impact of tariffs compared to the previous Fed meeting in January.
“They talk about tariffs in a completely different way,” he said.
Powell delayed the rate cut to combat higher prices as the Fed admitted that they initially thought the inflation coming out of the pandemic was temporary. However, he added that in this case it could be a “different situation.”
“But… we don’t really know that,” he added, noting that uncertainty engulfs the economy. “We have to see how things actually work.”
Fed policymakers also expect unemployment to rise from 4.1% to 4.4% by the end of this year.
The economic forecast highlights the tough spots the Fed may see this year. Higher inflation usually leads to the Fed, increasing key rates and even increasing interest rates. Meanwhile, as growth slows and unemployment rates rise, the Fed often drives more borrowing and spending and lowers fees to lift the economy.
It is the second meeting that the Fed has maintained interest rates at around 4.3% as central banks have moved to the sidelines as they assess the impact of Trump administration’s policies on the economy. Economists predict that tariffs are likely to boost inflation at least temporarily. However, other policies such as deregulation could reduce costs and cool inflation.
Powell acknowledged that many surveys of businesses and consumers have shown growing concerns about the economic outlook. However, he noted that the unemployment rate is low and the economy is still expanding.
“We understand that emotions have dropped quite sharply, but economic activity is not yet,” Powell said. “The economy seems to be healthy.”
Powell stressed that uncertainty about the economic outlook is “an extraordinarily rising,” and said the Fed is ready to be patient and see how the economy evolves before further movements.
“We’re not going to hurry up with the move,” he said. “We are well positioned to wait for more clarity, not to be in a hurry.”
The Fed also said it would slow down the Treasury holdings, which have grown significantly during and after the pandemic. Previously, the Treasury Department would allow $25 billion a month to mature without reinvesting revenue. Currently, only $5 billion can mature each month.
In fact, the Fed will reinvest expired bonds in more new securities. Powell characterizes the change as technical and has nothing to do with its interest policy. In the financial market, yields fell slightly.
Federal Reserve Governor Christopher Waller voted against the decision to delay the Treasury’s purchase. The Fed still allows securities backed by $35 billion in monthly mortgages.
Fed officials are closely looking at measures of Americans’ inflation expectations, which surged in one survey released last week. Inflation expectations – essentially a measure of worry about inflation getting worse – is important to the Fed as they can self-realize. If people expect higher inflation, they can take measures that can drive higher prices, such as accelerated purchases.
However, Powell at his press conference downplayed the idea of increasing it as an “outlier” and said in the long run Americans still seem to hope that inflation will be curtailed.
Retailers of both high-end and low-cost goods are warning that consumers are becoming more cautious as they expect prices to rise due to tariffs. After a sharp decline in January, retail sales rose modestly last month. Home builders and contractors expect home construction and renovations to be more expensive.
Alex Veiga, AP Business Writer in Los Angeles, contributed to this report.
Original issue: March 20, 2025 7:15am EDT
