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The Federal Reserve kept interest rates on hold on Wednesday as expected, but it raised its inflation and unemployment forecasts, trimmed its GDP projection and slowed the pace of the sale of some assets from its balance sheet. The CPI outlooks for this year and next are now 2.7% and 2.2%, respectively.
The governors held the key rate at 4.5% at this meeting, and the so-called dot plot showed year-end media federal funds rate of 3.9% at year-end, the same as in December, implying two cuts. The central bank cut maximum monthly redemptions of Treasuries to $5 billion from $25 billion.
Some of the faster inflation is “clearly” coming from tariffs, but it’s very difficult to determine how much, Jerome Powell told reporters after his briefing. The net effect of the administration’s changes to trade, immigration, fiscal policy and regulation is what “will matter for the economy,” and that remains unknown.
Policy isn’t on a pre-set course, and the Fed will continue to separate the signal from the noise to set policy — which isn’t on a pre-set course, Powell said. “We’re not in any hurry to ease.”
Really high uncertainty is making economic projections more difficult, which may account for the lack of change in the dot plot, he said. While Powell does eventually affect a meaningful estimation of the effect of tariffs and other policy changes, that will take some time, he added.
“The hard data has been in good shape,” Powell said. “It’s the soft data — the surveys — that have reflected concerns.”
Data has been mixed. Inflation slowed by more than expected last month, but that may have hidden an unpleasant surprise in the form of stalled progress. Jobs numbers have been mixed, but retail sales and industrial production have held up while business sentiment craters.
“The committee is in the midst of policy fog as they await the impact from upcoming tariffs,” Jeffrey Roach, chief economist for LPL Financial (LPLA+2.20%), wrote in an email. “The updated projections are more downbeat and will place downside pressure on the dollar in the near term.” Roach said he expects core inflation to slow by the summer, allowing the Fed to cut rates in June.