Washington (AFP) – The US Federal Reserve paused interest rate cuts again on Wednesday and noted an increase in economic uncertainty, as it navigates 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 decision was published, adding that at least part of a recent inflation uptick was related to tariffs. Since taking 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 tariffs on other countries. Many analysts fear Trump’s economic policies could push up inflation and hamper economic growth, and complicate 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. The “Fed has been pretty clearly communicating they’re going to wait and see.” “What has changed is the kind of broader economic environment, mostly coming out of chaotic policy coming from DC,” he added. “It’s quite unclear how high the tariffs will get, how widespread they will be, and how long they will last,” former Boston Fed president Eric Rosengren said in an interview ahead of the rate decision. The Fed’s vote was not unanimous, with one governor rebelling in opposition to his colleagues’ decision to slow the pace at which the Fed shrinks the size of its balance sheet.
– Slowing economy – Until fairly recently, the hard economic data had pointed to a fairly 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 fairly strong, with healthy levels of job creation, and an 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 the on-again, off-again rollout of tariffs. Against that backdrop, Fed policymakers tweaked their economic forecasts. While they still have two rate cuts penciled in this year and next, they have revised several other data points. They now expect economic growth to increase by 1.7 percent this year and by 1.8 percent next year — a sharp cut from the last economic outlook in December, and a slowdown from last year. They also raised their outlook for inflation in 2025 and 2026, and nudged up their forecast for the unemployment rate.
– Recession risk up – “Fed officials want to be careful not to overreact,” Nationwide chief economist Kathy Bostjancic told AFP ahead of the rate decision, adding she expects the Fed to ultimately make just one rate cut this year. Speaking to reporters on Wednesday, Powell said the risk of recession had risen slightly in recent weeks. “If you go back two months people were saying that the likelihood of a recession was extremely low,” he said. “So it has moved up but it’s not high.”
While Fed officials have sought to avoid criticizing the new administration, some outside analysts have been less restrained. “Trump’s management of economic policy has been a disaster,” Michael Strain, the director of economic policy studies at the conservative American Enterprise Institute, wrote in a recent blog post.
© 2024 AFP
