The US Federal Reserve on Wednesday left interest rates unchanged for a second consecutive meeting, but lowered the country's growth outlook as President Donald Trump's policies heighten uncertainty over the world's largest economy.
After Wednesday's decision, the Fed's target range remained at 4.25 to 4.50 per cent. Markets had virtually locked in the decision heading into the meeting.
"Uncertainty is unusually elevated," Fed chairman Jerome Powell told reporters in Washington. "We think it’s a good time for us to await for further clarity."
The Fed entered this week facing increasing uncertainty over the economic effects of Mr Trump's policies and as inflation remains above the Fed's 2 per cent target.
But it maintained its projection on future interest rate cuts Latest projections showed the central bank anticipates it will cut rates twice this year to lower the federal funds rate to 3.9 per cent by the end of 2025, unchanged from its December projections.
It expects rates to fall to 3.4 per cent by 2026 and 3.1 per cent by 2027, also unchanged from December.
Markets reacted positively to the Fed maintaining its interest-rate outlook for the year. The Dow Jones Industrial Average closed 383.32 points, or 0.92 per cent higher. The S&P 500 and Nasdaq Composite rose 1.08 and 1.41 per cent, respectively, while the small-cap Russell 2000 also closed in the green.
"Both the decision to not cut rates and the economic projections kind of landed right in the zone of what the street was expecting," Art Hogan, chief market strategist at B Riley Wealth, told The National. "But the biggest surprise was that they stuck with two rate cuts this year."
Fed expects lower growth, higher inflation
While its outlook for interest rates remained unchanged, the Fed now anticipates higher inflation. The median Fed official expects inflation to to rise by 2.7 per cent this year, up from 2.5 per cent. Core inflation is projected to increase by 2.8 per cent, also up from 2.5 per cent.
"It is going to be very difficult to have a precise assessment on how much inflation is coming from tariffs. Clearly, some of it is coming from tariffs," Mr Powell said, noting there "may be a further delay" in bringing inflation down.
Still, Fed officials projected that inflation would fall closer in line with their 2 per cent target in 2026 and 2027, suggesting they believe inflationary effects of Mr Trump's tariffs would not be persistent.
The Fed also lowered its growth outlook for this year from 2.1 per cent to 1.7 per cent. The unemployment rate is expect to be about 4.4 per cent.
Uncertainty over the President's trade agenda has pummelled markets in recent weeks. Economists generally say tariffs could lead to higher inflation and slow economic growth, otherwise known as stagflation.
Mr Trump remains adamant that his tariffs would lead to an economic boom, although he has not ruled out the possibility of a recession and said the economy faces “a period of transition”.
However, markets are anticipating the weakening associated with Mr Trump's policies could force the Fed to issue rate cuts this year. Traders expect it to reduce rates twice in 2025, according to CMEGroup data.
Other aspects of Mr Trump's administration are also weighing on the outlook, including deregulatory efforts, pushing through his tax policy, slashing the federal workforce and deporting migrants. Mr Powell said the Fed wants to see all of these policies' effects before adjusting rates.
Separately, the Fed said it would begin to slow down the pace of reducing its balance sheet level. Officials said they would reduce the monthly cap on Treasury securities that will be allowed to mature but not replaced will lower from $25 billion to $5 billion. The monthly cap on mortgage-backed securities remained at $35 billion.
Fed Governor Christopher Waller dissented against the balance sheet rundown plans, but approved it to maintain the Fed's rate decision.