Federal Reserve Keeps Rates Steady, Plans Future Rate Cuts Amid Economic Uncertainty

The Federal Reserve has decided to keep its key interest rate unchanged at 4.25% to 4.50%, a move that was widely anticipated. Despite this decision, the central bank has signaled its plans to reduce rates in the coming years. According to their latest projections, the Fed plans to cut rates by 0.50% twice in 2025 and another 0.50% twice in 2026.

In a statement following the meeting, the Fed noted that uncertainty surrounding the economic outlook has increased. However, the economy continues to expand at a solid pace, and the unemployment rate remains at a low level with a stable labor market. Despite this positive outlook, inflation is still somewhat elevated, and the Fed has expressed concerns about the risks to both sides of its dual mandate, which includes promoting maximum employment and stabilizing prices.

Starting in April, the Fed plans to slow the pace of its balance sheet runoff, reducing the monthly treasury redemption cap to $5 billion from $25 billion. The redemption cap on mortgage-backed securities will remain unchanged at $35 billion.

During the meeting, there was one dissenting vote from Governor Waller, who agreed with the decision to keep the policy rate unchanged but preferred maintaining the current balance sheet runoff pace.

The median forecast from Fed officials for the federal funds rate at the end of 2025 is 3.9%, unchanged from previous projections. For 2026, the median projection remains at 3.4%, and for 2027, it’s at 3.1%. The longer-run projection for the rate is 3.0%, consistent with earlier expectations.

The Fed’s projections indicate that there will be two rate cuts in 2025 and two more in 2026. However, the outlook is divided among officials. Four members expect no rate cuts in 2025, while four foresee one cut, nine anticipate two cuts, and two expect three cuts.

The Federal Reserve’s updated economic projections show a slight slowdown in economic growth, with GDP growth forecasted at 1.7% in 2025, down from 2.1% in December. Inflation is also expected to remain above the 2% target, with the Personal Consumption Expenditures (PCE) inflation projected at 2.7% by the end of 2025, compared to 2.5% in December. The core PCE inflation is expected to be at 2.8% instead of the previously anticipated 2.5%.

Fed officials also raised their projection for the unemployment rate at the end of 2025, predicting it will reach 4.4%, compared to the earlier forecast of 4.3%.

Following the Fed’s statement and projections, U.S. Treasury yields pared some of their earlier gains. The 10-year U.S. Treasury yield rose by 1.3 basis points to 4.295%, and the two-year Treasury yield was up by 0.8 basis points to 4.05%. The yield curve between two- and 10-year Treasury notes stood at a positive 23.9 basis points.

Market expectations, as reflected in interest rate futures, now imply a 56% chance of rate cuts this year, unchanged from before the statement was released. Futures also suggest a 62.1% chance that the Fed will resume rate cuts during its June meeting, up from 57% before the Fed’s decision.

Fed Chair Powell Starts Press Conference, Signals Cautious Approach Amid Economic Uncertainty

Fed Chair Powell stating that the economy is strong, and labor market conditions remain solid. However, inflation is still somewhat high. The Federal Reserve made a technical decision to slow down the pace of reducing its balance sheet. Powell mentioned signs of a slowdown in consumer spending and highlighted increased uncertainty in the economy. The outlook remains unclear, and it’s uncertain how this uncertainty will affect the economy.

The unemployment rate has remained stable over the past year, and the labor market is broadly balanced, not contributing to inflation. Inflation likely rose by 2.5% in December, with core inflation at 2.8%. Expectations for inflation have recently risen, partly due to tariffs, but long-term inflation expectations are still aligned with the 2% target.

The new administration is making significant policy changes, but the overall impact is still unclear. Powell emphasized that there’s a high level of uncertainty around these changes and their economic effects. The Fed is focused on separating important signals from noise and doesn’t feel the need to rush decisions. Powell stressed that they are well-positioned to wait for more clarity as the uncertainty is unusually high, and the policy is not on a preset course.