The Federal Reserve held interest rates steady on Wednesday, keeping the target range at 4.25%-4.5% while maintaining its outlook for two rate cuts later in the year. The decision was widely expected, with markets pricing in almost no chance of an immediate move.
In addition to keeping rates unchanged, the Fed announced a further slowdown in its quantitative tightening programme, gradually reducing the bonds on its balance sheet.
Policymakers also downgraded their U.S. economic growth forecasts while raising inflation projections.
Fed Chair Jerome Powell acknowledged that tariffs are contributing to inflationary pressures.
“Some of it, the answer is clearly some of it, a good part of it, is coming from tariffs,” Powell said in his post-meeting press conference. “But we’ll be working with other forecasters to separate nontariff inflation [from] tariff inflation.”
The Fed now expects inflation to rise by an average of 2.7% this year, up from a previous estimate of 2.5%.
Despite economic uncertainty stemming from tariffs, tax cuts, and deregulation, officials reaffirmed their forecast for a total of 0.5 percentage points in rate cuts through 2025, which would imply two quarter-point reductions.
Investors responded positively to the Fed’s signals, with the Dow Jones Industrial Average surging over 400 points following the announcement.
Powell noted that monetary policy remains flexible and data-dependent.
“If the economy remains strong, and inflation does not continue to move sustainably toward 2%, we can maintain policy restraint for longer,” he said. “If the labour market were to weaken unexpectedly, or inflation were to fall more quickly than anticipated, we can ease policy accordingly.”
