The Federal Reserve’s interest rate policy meeting ending Wednesday afternoon is highly unlikely to produce the immediate rate cut(s) President Donald Trump hopes to see, as Trump’s tariffs throw a new wrench into a complicated stretch for the U.S. central bank.
Federal Reserve Chairman Jerome Powell testifies before the House Committee on Financial Services ... [+]
The second of the Federal Open Market Committee’s eight meetings this year will conclude at 2 p.m. EDT, when the panel will announce whether it intends to change the target federal funds rate, the level at which banks can loan to one another which heavily influences borrowing costs across the economy.
Economists and traders alike view it as a near lock that the Fed will opt to hold rates steady at 4.25% to 4.5%; JPMorgan’s chief U.S. economist Michael Feroli said it “appears obvious” this will be the course of action, while the market prices in a 99% chance of a hold, according to CME Group’s FedWatch Tool.
But that doesn’t mean the meeting will be drama free, as the Fed will release its quarterly economic projections, or dot plot, which will reveal where central bankers expect economic growth, inflation, unemployment and interest rates to settle by the end of 2025 and beyond—critical data points as early recession fears surface.
Fed staff “will have to rethink their projections now that the first tariffs have taken effect and the White House looks set to eventually impose larger tariffs than initially seemed likely,” David Mericle, Goldman’s chief U.S. economist, wrote in a Sunday note to clients.
Bank of America economists led by Aditya Bhave project the Fed’s median end-of-2025 core inflation forecast will rise to 2.7% from December’s 2.5% and its fourth-quarter gross domestic product growth projection will fall from 2.1% to 1.8%, while, perhaps most crucially, the policymakers will revise their longer run interest rate forecast up from 3% to 3.25%, a further jump from last March’s 2.6% projection.
Trump said Jan. 23 he would “demand that interest rates drop immediately,” though Wednesday, the second meeting since Trump’s second inauguration, is highly unlikely to bring such rate cuts. Even as the Fed holds its rates firm, Trump celebrated the “big beautiful drop” in “interest rates” earlier this month, an apparent reference to declining yields for 10-year Treasury bonds, which are the benchmark for many loans, including mortgages, and follow market expectations for longer-term Fed policy. The Fed has kept rates at 4.25% to 4.5% since December, putting a hold on its loosening cycle and taking a breather in a whirlwind 2020s for monetary policy. In March 2020, the Fed slashed rates to near zero to help keep the economy afloat, before raising rates to a two-decade high of over 5% by mid 2023 to combat high inflation, then cutting rates for the first time in more than four years beginning last September.
For the last four years, the Fed’s primary focus has been on cooling inflation, which has slowly come down toward its 2% target, though most economists warn Trump’s tariffs will lead to higher consumer prices, at least in the near term. But the central bank may soon shift its intention to keeping the economy afloat amid recession and growth fears. Mericle lays out “two possible paths to cuts” this year, with one scenario coming “if tariffs fall short of our expectations and inflation ends up lower,” letting the Fed resume its cutting cycle relatively undeterred, or if tariff risks to the economy are “considerably more serious” than anticipated, leading to stimulatory cuts seen in times of distress like they came in 2008 and 2020.
Fed Chairman Jerome Powell will hold a press conference beginning at about 2:30 p.m. to give further insight on how policymakers’ evaluation of the economy has shifted. Powell “has done a good job since Inauguration Day in staying out of the news cycle” and “we suspect he will hope this continues,” remarked Feroli. Though Trump nominated Powell to his post in 2017, Powell has become a frequent target of Trump throughout the years, even labeling Powell an “enemy” in 2019.