Washington (AFP) – The US Federal Reserve paused interest rate cuts again on Wednesday and warned of increased economic uncertainty as it seeks to navigate an economy unnerved by President Donald Trump’s stop-start tariff rollout. Policymakers voted to hold the US central bank’s key lending rate at between 4.25 percent and 4.50 percent, the Fed announced in a statement. They also cut their growth forecast for 2025 and hiked their inflation outlook, while still penciling in two rate cuts this year — in line with their previous forecast in December.
“Uncertainty today is unusually elevated,” Fed chair Jerome Powell told reporters after the US central bank’s decision was published, adding that at least part of a recent rise in inflation was down to tariffs. All three major Wall Street indices closed higher on the news, while government bond yields fell after the Fed announced it would slow down the rate at which it is reducing its balance sheet, which swelled during the pandemic. In an unusual move, Fed governor Christopher Waller opposed the Fed’s rate decision because of his colleagues’ support for slowing down the pace at which it is shrinking the balance sheet.
Since returning to office in January, Trump has ramped up levies on top trading partners including China, Canada, and Mexico — only to roll some of them back — and threatened to impose reciprocal measures on other countries. Many analysts fear Trump’s economic policies could push up inflation and hamper economic growth, complicating the Fed’s plans to bring inflation down to its long-term target of two percent while maintaining a healthy labor market.
“Everybody knew there was not going to be a rate cut,” Moody’s Analytics economist Matt Colyar told AFP after the Fed’s decision was published. “What has changed is the kind of broader economic environment, mostly coming out of chaotic policy coming from DC.” Until fairly recently, the hard economic data pointed to a robust American economy, with the Fed’s favored inflation measure showing a 2.5 percent rise in the year to January — above target but down sharply from a four-decade high in 2022. Economic growth was relatively robust through the end of 2024, while the labor market has remained quite strong, with healthy levels of job creation and the unemployment rate hovering close to historic lows.
But the mood has shifted in the weeks since Trump returned to the White House, with inflation expectations rising and financial markets tumbling amid his on-again, off-again rollout of tariffs. In updated economic forecasts published Wednesday, Fed policymakers sharply cut their growth forecast for this year to 1.7 percent, down from 2.1 percent in the last economic outlook in December. They also downgraded their outlook for growth next year, while raising their forecast for headline inflation in both 2025 and 2026. But they kept their rate cut predictions largely unchanged, penciling in two rate cuts this year and next, in line with their previous forecast.
Powell told reporters that the risk of recession in the United States had risen slightly in recent weeks, but was not yet a cause for concern. “If you go back two months, people were saying that the likelihood of a recession was extremely low,” he said. “It has moved up but it’s not high.” At the White House, which sits a short walk from the Fed’s Washington headquarters, Trump’s National Economic Council director Kevin Hassett took questions about the Fed chair’s press conference. “I try not to cherry pick things that chairman Powell said,” he told reporters. “And I think that chairman Powell is clear that if there were a tariff effect, it’s a transitory one.”
“What gets tariffed and not is something that you’ll have complete clarity on on April 2,” he added, referring to the date at which Trump has said he intends to impose retaliatory levies on US trading partners.
© 2024 AFP
