Markets rally as the Federal Reserve maintains rates, but officials warn of growing economic risks
The US Federal Reserve kept its benchmark interest rates unchanged on Wednesday while signalling potential reductions later in the year, according to CNBC.
The Federal Open Market Committee (FOMC) maintained the key borrowing rate at 4.25–4.5 percent, the same level since December.
Market expectations for a change during the two-day policy meeting were minimal.
Alongside its decision, the Fed released updated projections for interest rates and economic growth through 2027. Despite ongoing uncertainty surrounding tariffs and fiscal policy measures, officials still anticipate lowering rates by half a percentage point by the end of 2025.
Given the Fed’s usual preference for quarter-point adjustments, this would mean two reductions within the year.
Following the announcement, the Dow Jones Industrial Average climbed more than 400 points as investors responded positively to the potential for future rate cuts.
However, in a press conference, Federal Reserve Chair Jerome Powell emphasized that rates could remain elevated if economic conditions require it.
“If the economy remains strong, and inflation does not continue to move sustainably toward 2 percent, we can maintain policy restraint for longer,” Powell stated. “If the labor market were to weaken unexpectedly, or inflation were to fall more quickly than anticipated, we can ease policy accordingly.”
The FOMC acknowledged increasing economic uncertainty in its post-meeting statement.
“Uncertainty around the economic outlook has increased,” the statement read. “The Committee is attentive to the risks to both sides of its dual mandate.”
Powell noted a slowdown in consumer spending and suggested that tariffs could drive up prices, contributing to the Fed’s cautious outlook.
The committee revised its economic growth forecast downward, now expecting GDP to expand at 1.7 percent in 2024, a reduction of 0.4 percentage points from December’s projection.
At the same time, the US core inflation estimate increased to 2.8 percent annually, 0.3 percentage points higher than previously expected.
Consumer confidence has declined sharply, with the University of Michigan’s index dropping 11 percent in March to its lowest level since November 2022. The decline is linked to concerns over tariffs, government layoffs, and funding reductions.
New projections in the Fed’s ‘dot plot’ suggest a slightly more hawkish stance compared to December.
At the previous meeting, only one official expected no rate changes in 2025, while four now share that view.
The forecast for 2026 and 2027 remains unchanged, with two cuts projected for 2026 and one additional reduction in 2027. The long-term expectation is for the federal funds rate to stabilize at around 3 percent.
In addition to interest rate policy, the Fed adjusted its approach to 'quantitative tightening'—the process of reducing its bond holdings.
The American central bank will now allow only US$5bn in Treasury maturities to roll off its balance sheet each month, a significant reduction from the previous US$25bn.
However, it retained the US$35bn cap on mortgage-backed securities, which it has rarely reached since the program began.
Fed Governor Christopher Waller dissented in the vote, supporting the decision to hold rates steady but preferring to maintain the previous pace of the bond runoff.
Jamie Cox, managing partner at Harris Financial Group, interpreted the move as an indirect rate cut. “The Fed indirectly cut rates today by taking action to reduce the pace of runoff of its Treasury holdings,” he said.
“The Fed has multiple things to consider in the balance of risks, and this move was one of the easiest choices. This paves the way for the Fed to eliminate runoff by summer, and, with any luck, inflation data will be in place where reducing the Federal Funds rate will be the obvious choice.”
The Fed’s decision follows a turbulent period for financial markets as US President Donald Trump’s administration continues implementing tariffs.
The White House has already imposed duties on steel, aluminum, and other goods, with the possibility of further action after a review scheduled for April 2.
Consumers have shown growing concern over the economic outlook, adjusting inflation expectations in response to tariff-related uncertainty.
February retail spending rose, but at a slower-than-anticipated pace, while broader indicators suggest consumers are managing the ongoing political and economic challenges.
Labour market data also reflects signs of strain. February’s nonfarm payroll growth fell short of expectations, and a broader unemployment measure—which includes discouraged and underemployed workers—rose by 0.5 percentage points, reaching its highest level since October 2021.
Despite these challenges, Bank of America CEO Brian Moynihan presented a more optimistic view of consumer activity.
He stated that card data indicates spending remains strong and projected that the US economy will grow by approximately 2 percent this year.
David Russell, global head of market strategy at TradeStation, highlighted the mixed signals from the Fed’s projections. “Today’s Fed moves echo the kind of uncertainty Wall Street is feeling,” he said.
“Their expectations are a little stagflationary because [US] GDP estimates came down as inflation inched higher, but none of it is very decisive.”
