Published on: March 20, 2025
In line with market expectations, the US Federal Reserve (Fed) kept its policy rate unchanged on Wednesday, following its first meeting since the outbreak of the trade conflict between the United States and most of the country’s trading partners.
Stating that it could announce rate cuts at subsequent meetings, the central bank justified its decision by referring to the increased uncertainty clouding the economic outlook, two months after Donald Trump’s return to the White House.
In parallel with this decision, the authorities have updated their economic and rate projections for this year and up to 2027.
The Federal Open Market Committee (FOMC) now expects slower economic growth this year than three months ago, with the unemployment rate in the United States expected to reach 4.4%, up from 4.3%, according to the most recent economic projections. The central bank also expects inflation to reach 2.7%, up from the current 2.5%.
Furthermore, policymakers now expect the country’s GDP to grow by 1.7% this year, down from the 2.1% forecast in December. On a comparative basis, GDP grew by 2.8% in 2024.
At a press conference following the meeting, Fed Chairman Jerome Powell noted that the current economic landscape is characterized by “unusually high” uncertainty, also referring to a transitional rise in inflation.
A quick glance at the Fed’s forecasts published today shows that the central bank has revised GDP growth downwards and inflation upwards, pointing to increased uncertainty. The downward revision of growth without a change in the policy rate forecast probably stems from the rise in inflation expectations.
Fundamentally speaking (without factoring in the effects of import tariffs), there is not much inflationary pressure in the US economy. Unit labour costs are less than 2.0% on a year-on-year basis and the latest three-month core personal consumption expenditure inflation rates have been fairly low. Nevertheless, as Mr. Powell pointed out, inflation expectations are on the rise.
Following the Fed’s decision, the markets are now anticipating a key rate of around 3.75% towards the end of the year, which is about 25 basis points below the Fed’s forecasts. We can therefore conclude that the central bank is not expected to lower its funds rate much this year, as the shock of the tariffs would not cause a recession, but rather slow down the US economy.