The US Federal Reserve kept the benchmark rate unchanged in the 4.25-4.5% range in its meeting today. “In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks,” the statement read.
“Recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty around the economic outlook has increased. The Committee is attentive to the risks to both sides of its dual mandate,” the FOMC statement read.
Federal Reserve officials maintained their projection of two interest rate reductions in 2025, whilst revising their growth estimates downwards for 2025 and increasing their inflation predictions.
The US central bank officials suggested they continue to expect a reduction in borrowing costs by 50 basis points before year-end, considering the anticipated economic slowdown and eventual decline in inflation rates.
The Fed’s outlook for inflation saw an upward revision, with their preferred price increase measure projected to reach 2.7% by year-end, compared to the previously forecasted 2.5% in December. The Federal Reserve maintains an inflation target of 2%.
Additionally, they reduced the US GDP growth forecast for the current year from 2.1% to 1.7%, alongside predictions of a marginally higher unemployment rate by the end of this year.
“In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments,” the statement added.
Most market analysts expected the Federal Reserve to maintain its current interest rate whilst monitoring economic developments. The job market appears stable, following robust economic performance at the end of last year.
There is considerable ambiguity regarding the economic impact of US President Donald Trump’s policies. His stated objectives include revitalising domestic manufacturing and reducing federal workforce numbers.
The constant stream of policy declarations from Trump regarding tariffs and other measures has generated significant economic uncertainty. Economists are concerned this might lead American businesses and consumers to reduce their expenditure.
Should economic conditions deteriorate, the Federal Reserve maintains the option to stimulate growth through interest rate reductions, as demonstrated in previous economic downturns. With the primary interest rate currently ranging between 4.25% and 4.50%, there remains substantial scope for adjustment.
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However, as pointed out in an Associated Press report, the US Federal Reserve faces a more complex scenario in its current decision-making process. Whilst reducing interest rates would stimulate the economy, it could simultaneously drive inflation higher, particularly concerning given the existing tariff-related inflationary pressures.
The Fed lacks effective mechanisms to address “stagflation,” a situation characterised by economic stagnation coupled with persistent high inflation, the report notes.
Interest rate reductions, previously viewed as positive responses to inflation approaching the Fed’s 2% target, might now be perceived negatively. These cuts could become necessary to counteract economic challenges stemming from widespread tariffs, substantial reductions in government expenditure, and heightened economic uncertainty.
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Meanwhile, US GDP growth projections have undergone significant downward revisions, with Barclays adjusting its growth forecast to 0.7%, a substantial decrease from 2.5% in 2024. Goldman Sachs analysts project that core inflation, which excludes food and energy prices, will increase to 3% by year-end, rising from the current 2.6%.
