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Fed Holds Interest Rates Steady, Still Sees Two Cuts Coming This Year
Fed Holds Interest Rates Steady, Still Sees Two Cuts Coming This Year
20 tháng 3 2025・ 01:17
WASHINGTON – The Federal Reserve, in a closely watched decision on Wednesday, held the benchmark interest rates steady but indicated that reductions are likely later this year.
Facing concerns over the impact of tariffs on a slowing economy, the rate-setting Federal Open Market Committee (FOMC) kept its key borrowing rate in the range of 4.25%-4.5%, where it has remained since December. Markets had priced in virtually zero chance of any change at this week’s two-day policy meeting.
Alongside the decision, Fed officials updated their rate and economic projections through 2027 and adjusted the pace at which they are reducing bond holdings.
Despite the uncertain impact of tariffs imposed by President Donald Trump, along with an ambitious fiscal policy of tax cuts and deregulation, officials still expect two quarter-percentage-point rate cuts by 2025.
Investors reacted positively to the news, pushing the Dow Jones Industrial Average up by more than 400 points following the decision. However, in a press conference, Fed Chair Jerome Powell emphasized that the central bank would keep rates elevated if economic conditions required.
“If the economy remains strong and inflation does not continue to move sustainably toward 2%, we can maintain policy restraint for longer,” Powell said.
“If the labor market were to weaken unexpectedly, or inflation were to fall more quickly than anticipated, we can ease policy accordingly.”
Uncertainty Has Increased
In its post-meeting statement, the FOMC acknowledged a high level of uncertainty surrounding the current economic climate.
“Uncertainty around the economic outlook has increased,” the statement read. “The Committee is attentive to the risks to both sides of its dual mandate.”
The Federal Reserve's dual mandate is to maintain maximum employment and stable prices.
During the press conference, Powell noted a moderation in consumer spending and warned that tariffs could put upward pressure on prices. These factors likely contributed to the committee’s more cautious economic outlook.
The Fed downgraded its economic growth forecast, now projecting the economy to grow at just 1.7% in 2024, down 0.4 percentage points from the last projection in December. Meanwhile, core inflation is expected to rise at an annual pace of 2.8%, up 0.3 percentage points from the prior estimate.
According to the “dot plot” of officials’ rate expectations, the view on future rates has turned somewhat more hawkish since December. At the previous meeting, just one participant saw no rate changes in 2025, compared with four now.
The grid showed rate expectations unchanged from December for future years, with the equivalent of two cuts expected in 2026 and one more in 2027 before the fed funds rate settles in at a longer-run level around 3%.
Scaling Back ‘Quantitative Tightening’
In addition to the rate decision, the Fed announced a further scaling back of its “quantitative tightening” program, in which it slowly reduces the bonds it holds on its balance sheet.
The central bank will now allow just $5 billion in maturing proceeds from Treasurys to roll off each month, down from $25 billion. However, it left a $35 billion cap on mortgage-backed securities unchanged, a level it has rarely hit since starting the process.
Fed Governor Christopher Waller was the lone dissenting vote for the Fed’s move. However, the statement noted that Waller favored holding rates steady but wanted to see the QT program continue at its current pace.
“The Fed indirectly cut rates today by taking action to reduce the pace of runoff of its Treasury holdings,” said Jamie Cox, managing partner for Harris Financial Group. “The Fed has multiple things to consider in the balance of risks, and this move was one of the easiest choices. This paves the way for the Fed to eliminate runoff by summer, and, with any luck, inflation data will be in place where reducing the Federal Funds rate will be the obvious choice.”
The Fed’s actions follow a hectic beginning to Trump’s second term in office. The Republican president has rattled financial markets with tariffs implemented on steel, aluminum, and an assortment of other goods affecting U.S. global trading partners.
In addition, the administration is threatening another round of even more aggressive duties following a review scheduled for release on April 2.
Uncertainty over what is to come has weakened consumer confidence, with recent surveys showing that inflation expectations have risen due to the tariffs. Retail spending increased in February, albeit less than expected, though underlying indicators suggest that consumers are still weathering the stormy political climate.
Stocks have been fragile since Trump assumed office, with major indexes dipping in and out of correction territory as administration officials caution about an economic reset away from government-fueled stimulus toward a more private sector-oriented approach.
Bank of America CEO Brian Moynihan countered much of the gloomy talk on Wall Street earlier Wednesday. The head of the second-largest U.S. bank by assets said card data shows consumer spending remains solid, with BofA economists expecting the economy to grow around 2% this year.
However, some cracks have been showing in the labor market. Nonfarm payrolls grew at a slower-than-expected pace in February, and a broad measure of unemployment—including discouraged and underemployed workers—jumped half a percentage point during the month to its highest level since October 2021.
“Today’s Fed moves echo the kind of uncertainty Wall Street is feeling,” said David Russell, global head of market strategy at TradeStation. “Their expectations are a little stagflationary because GDP estimates came down as inflation inched higher, but none of it is very decisive.”
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