Federal Reserve Holds Benchmark Rate Steady, Raises Inflation Forecast and Lowers Growth Projection

Key Points

• The Federal Reserve announced on Wednesday (March 19) that it would keep its main interest rate unchanged in the range of 4.25% to 4.5%, while predicting higher inflation and slower economic growth in 2025.
• In the median projections of the dot plot, Fed officials expect their preferred inflation gauge—the core personal consumption expenditures (PCE) price index, which excludes volatile food and energy prices—to reach 2.8% by year-end, 0.3 percentage points higher than their December forecast. Officials also lowered their 2025 economic growth forecast to 1.7% from the previous 2.1%. Fed officials still expect at least two 25-basis-point rate cuts within the year.
• The Trump administration's tariffs and other policy changes have created "very high uncertainty," Fed Chair Jerome Powell said at a press conference after the two-day policy meeting. "Tariffs are coming, but we don't know the magnitude or the speed," he said. "But we know tariffs will be implemented, and they tend to weigh on growth and push up inflation in the near term."

In-Depth Analysis

Since Fed officials met in January, consumer surveys and economic data have flashed warning signs of rising inflation risks and slowing growth.

Consumer spending contracted by 0.5% in January, while retail sales grew only 0.2% last month, below expectations. Surveys from the Conference Board and the University of Michigan show consumer confidence has fallen sharply in recent weeks, with expectations for price pressures also rising.

Economists point out that the dual risk of weak growth and rising inflation—so-called "stagflation"—mainly stems from the policy shifts of the Trump administration, including tariffs, large-scale cuts to federal employees, and planned mass deportations.

"The new administration is implementing significant policy changes in four different areas: trade, immigration, fiscal policy, and regulation," Powell said. "The net effect of these policy changes will determine the path of the economy and the path of monetary policy."

"Although there has been recent progress in some of these areas, especially trade policy, uncertainty surrounding these changes and their impact on the economic outlook remains high," he said. "As we consider adjustments to monetary policy, we are focused on separating the signal from the noise."

President Donald Trump and his senior advisers have said their actions may cause economic disruption in the short term but will strengthen U.S. manufacturing and economic power in the long run.

"Tariffs are about making America rich again and making America great again," Trump said in his State of the Union address to Congress this month. "There will be a little disturbance. We're okay with that. It won't be much."

Goldman Sachs last week lowered its 2025 U.S. gross domestic product (GDP) growth forecast to 1.7% from the previous 2.4%.

"Our trade policy assumptions have become significantly more adverse, and the (Trump) administration is guiding market expectations to accept tariff-induced short-term economic weakness," Goldman Sachs Chief Economist Jan Hatzius said in a research note.

Hatzius said U.S. tariff rates could rise by 10 percentage points, double Goldman's previous forecast and five times the increase during Trump's first term.

The Atlanta Fed predicted Tuesday that first-quarter GDP could contract at an annualized rate of 1.8%. The regional Fed bank had forecast a 1.6% contraction for the first quarter on March 7.

Powell said he sees underlying resilience in the economy.

"Growth appears to be slowing somewhat, and consumer spending is also decelerating moderately, but it remains at a solid pace," Powell said, noting that the unemployment rate is at a relatively low 4.1% and job creation is "at a healthy level."

"Inflation has now started to pick up, and we think part of that is due to tariffs, and further progress this year may be delayed," he added. "Overall, this is a solid situation."

Powell's remarks echoed the language in the Federal Open Market Committee's (FOMC) post-meeting statement.

"Recent indicators suggest that economic activity continues to expand at a solid pace," the FOMC said in its statement, while noting that "inflation remains somewhat elevated" and "uncertainty around the economic outlook has increased."

There are no signs yet of a sudden price surge. Data released last week by the U.S. Bureau of Labor Statistics showed inflation rose less than expected last month. After rising 0.4% in January, the core consumer price index (CPI), which excludes volatile food and energy prices, rose 0.2% in February, driven by a 0.3% increase in housing costs and a 0.9% rise in used car and truck prices.

Still, Powell has warned for months that the path back to the Fed's 2% inflation target could be bumpy.

"We see it in both market-based indicators and survey-based indicators, and survey respondents—whether consumers or businesses—mention tariffs as a factor pushing up prices over the next year or so," Powell said about the outlook for price pressures. "However, most longer-term inflation expectations indicators remain consistent with our 2% inflation target."

Powell said Fed officials see no urgency to adjust borrowing costs and are well positioned to recalibrate monetary policy in response to challenges on either side of their dual mandate—ensuring price stability and maximum employment.

"We don't need to be in a hurry to adjust our policy stance, and we are well positioned to wait for clearer information," he said.