The Federal Reserve has released its much-anticipated decision on interest rates—and in no surprise to anyone, has decided to leave well enough alone.
The Federal Open Market Committee agreed to keep rates in a holding pattern at a target range between 4.25% and 4.5%. Although this outcome was widely expected, the Fed’s latest meeting wasn’t a C-span-style snooze by any means.
The central bankers cut their GDP growth forecasts in 2025 to 1.7%, down from 2.1% in December, while they hiked their inflation expectations from 2.5% to 2.7%. That’s a long way from the Fed’s goal of 2%, though Jerome Powell doesn’t seem to be in a rush given rising economic uncertainty.
“We do not need to be in a hurry to adjust our policy stance, and we are well positioned to wait for greater clarity,” Powell told reporters in his usual calm, soothing voice.
The Fed is in a tough spot
The Fed has had quite a wild ‘n crazy few years. Beginning in early 2022, the central bank raised its benchmark borrowing rate eleven times to cool the economy. By the end of 2024, with inflation subsiding, it cut rates three times. Many hailed Powell for steering us toward the much-hoped-for “soft landing.”
That all changed with Donald Trump. Tariffs, trade wars, DOGE layoffs, and overall confusion have raised concerns of stagflation, the dreaded combo of rising prices and a slowing economy. This puts the Fed in a tricky spot: If it cuts rates too much too fast, it risks opening the barn door to runaway inflation, again. But if it doesn’t cut rates enough, our shell-shocked economy could stumble into a recession. What to do?
Making sense of market moves
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At its meeting last December, the Fed foresaw two rate cuts in 2025, down from the four projected in September 2024. It looks like Powell will stick to that plan: Central bankers expect to cut interest rates by half a percentage point this year, or two rate cuts in 2025, with another two cuts expected in 2026.
But if the economic situation changes quickly—and as tariff uncertainty has illustrated in recent weeks, that can happen—more rate cuts could come sooner than anyone anticipates.
“I wouldn’t be surprised if the Fed opted for just one more cut this year,” wrote Senior Investment Strategist at Charles Schwab Kevin Gordon. “However, if economic data were to deteriorate, a fast cutting cycle is not off the table.”
Zoom out: While markets once rose and fell on Jerome Powell’s every word, in this new world order, how much power does the Fed even have anymore?
“The reality is that post-inauguration, monetary policy has not been in the driver’s seat for stocks,” wrote Gordon. “For the foreseeable future, fiscal and Washington policy are going to be dominant. If we remain in an on-again, off-again tariff world, visibility for businesses will continue to be poor. That’s not the best for stocks.”
Maybe we should all stand to take a page from Powell, pop a chill pill, and see how this all plays out.—JD