Fed: Inflation Rises on Trade Uncertainty

Fed Holds Steady on Forecast for Two Rate Cuts in 2025 — For Now

The Federal Reserve is sticking with its projection of two interest rate cuts in 2025, despite rising uncertainty fueled by President Donald Trump’s tariffs and their potential impact on growth and inflation.

“Uncertainty today is unusually elevated,” Fed Chair Jerome Powell said Wednesday, following the decision to leave short-term interest rates unchanged. “We are going to have to see how things actually work out.”

While the Fed’s latest projections still show two cuts next year, Powell emphasized that officials are hesitant to make any immediate moves until they have more clarity on how the economy reacts to the new trade policies. He added that with the economy still relatively strong, the Fed has room to be patient.

“We are well-positioned to wait for greater clarity,” Powell said.

Markets responded positively to the Fed’s cautious stance, with the Dow Jones Industrial Average rising 0.92% and the S&P 500 gaining 1.08%.

However, signs of division within the Fed are growing. Eight officials now expect one or no rate cuts this year, up from four in December — a more hawkish shift that took some economists by surprise.

“The market was bracing for a more consistently hawkish message from the Fed, driven by inflation concerns,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank.

Still, others noted Powell’s calm tone. “He seemed very relaxed about inflation,” said Padhraic Garvey, regional head of research Americas at ING.

Nonetheless, the Fed did lower its growth forecast for 2025, citing the risk of a trade war. GDP growth is now projected at just 1.7%, down from 2.1%, with inflation expected to rise to 2.7% by the end of the year — well above the central bank’s 2% target.

Powell acknowledged tariffs were likely contributing to higher inflation but suggested these effects could be temporary, predicting inflation would ease to 2.2% in 2026.

Some economists questioned the Fed’s mixed signals. “So just to recap: Powell says uncertainty is high, inflation is going up, forecasts are scattered, yet they still call for two rate cuts this year. Seems wildly unlikely,” economist Robert Frick commented on social media.

Luzzetti added that any rate cuts in 2025 would likely be in response to economic weakness — what he called “bad-news cuts.”

Separately, the Fed also announced it would slow the pace of its balance sheet reduction. Starting next month, it will allow only $5 billion in Treasurys to mature without replacement each month, down from a cap of $25 billion. The Fed will continue to let $35 billion of mortgage-backed securities roll off monthly.

In a rare dissent, Fed Governor Christopher Waller voted against the decision, preferring no changes.

Overall, the economy has lost momentum since the start of the year, as uncertainty around tariffs and immigration policy weighs on growth. At the same time, inflation remains stubbornly above the Fed’s 2% goal, leaving policymakers in a tough position.

With the White House set to announce reciprocal tariffs on April 2, economists worry inflation could spike even higher, while growth stagnates — a challenging scenario for the Fed.

Scott Anderson, chief U.S. economist at BMO Capital Markets, warned that Powell’s next press conference in May could be much tougher. “I think the data is going to look quite a bit uglier in a few months,” he said.