US Federal Reserve keeps interest rates unchanged at 4.25%-4.5%

The Federal Open Market Committee (FOMC) decided to keep its key borrowing rate within a target range of 4.25% to 4.5%, a level it has maintained since December. The committee revised its economic growth outlook downward while raising its inflation forecast.

The FOMC now expects the economy to grow at a slower pace of 1.7% this year, a reduction of 0.4 percentage points from the previous December estimate. Additionally, officials adjusted their inflation projection, forecasting core prices to rise at a 2.8% annual rate, an increase of 0.3 percentage points from earlier predictions.

Along with the interest rate decision, the Fed also revealed a further slowdown in its “quantitative tightening” program, which involves gradually reducing the bonds held on its balance sheet. The Fed will now allow only $5 billion in maturing Treasury securities to roll off each month, a sharp decrease from the previous $25 billion.

Positive outlook despite concerns over tariffs

Despite concerns over the impact of tariffs on a slowing economy, the FOMC signaled that additional rate cuts could occur later in the year. However, markets had not expected any immediate action from the Fed during its two-day policy meeting, and the decision to hold rates steady came as no surprise.

Fed officials also updated their rate and economic projections for the next several years. Despite the uncertainty surrounding tariffs, the Fed still expects another 0.5 percentage points in rate cuts through 2025. Investors responded positively to the possibility of further rate reductions, with the Dow Jones Industrial Average gaining more than 400 points after the announcement. However, Fed Chairman Jerome Powell cautioned that the central bank would be prepared to keep rates elevated if needed, depending on economic conditions.

In a statement following the meeting, the FOMC acknowledged an increase in uncertainty surrounding the economic outlook and reaffirmed its commitment to balancing its dual mandate of full employment and price stability. Powell noted a slowdown in consumer spending and the potential for tariffs to drive up prices, factors that may have contributed to the more cautious economic outlook.

The “dot plot” of rate expectations showed a shift towards a slightly more hawkish stance since December, with more officials predicting no rate changes in 2025. Projections for future years remained unchanged, with two expected rate cuts in 2026 and one more in 2027, bringing the fed funds rate to a long-term target of around 3%.