(Bloomberg) — Federal Reserve officials will likely hold interest rates steady when they meet Wednesday, buying time to assess how President Donald Trump’s policies impact an economy facing both lingering inflationary pressures and mounting growth concerns.
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Fresh tariffs from the Trump administration, paired with retaliatory action from US trade partners, have dented consumer sentiment and fanned Americans’ expectations for future inflation. And with some levies getting postponed shortly after being announced, it’s unclear how the trade war will ultimately shape the economy.
The uncertainty will likely keep policymakers in a wait-and-see mode, reluctant to wed themselves to a particular path of policy.
“I think there’s going to be a fairly wide dispersion on the trajectory for rate cuts because of the uncertainty,” said Diane Swonk, chief economist at KPMG.
The Fed’s rate decision, along with officials’ updated quarterly economic forecasts, will be released at 2 p.m. Wednesday in Washington. Chair Jerome Powell will hold a post-meeting press conference 30 minutes later.
Statement
Officials are widely expected to hold their benchmark interest rate in a range of 4.25%-4.5%, but Fed watchers say the post-meeting statement could change slightly amid recent data pointing to slower activity.
Mentions of an uncertain outlook and balanced risks to their employment and inflation mandates are likely to remain unchanged, economists say, but policymakers may scrap their description of a “solid pace” of economic growth.
Updated Projections
The economic picture has evolved since officials last submitted their projections for interest rates in December. Tariff threats have escalated, fresh data — including a souring in consumer sentiment — has sparked concerns about the growth outlook, and stock prices have slid sharply in recent weeks.
More policymakers could signal a preference to hold rates steady, a “natural outcome” given the uncertainty of many of Trump’s policies, especially around trade, Swonk said. “Do we have a trade war that’s so bad that it causes a much deeper recession? We don’t know.”
In the December Summary of Economic Projections, Fed officials had penciled in two rate cuts for this year, according to the median estimate. Economists generally expect the central bank will continue to signal two reductions for 2025 in the so-called “dot plot” this week.
Many Fed watchers expect the updated forecasts to show officials marked down their estimates for growth this year and upped their projections for a key gauge of inflation, compared to December. Some also expect officials to raise their unemployment projections.
“What will be reflected in the forecast will be a stagflation scenario. The question is how much ‘stag’ and how much ‘flation,’” said Guneet Dhingra, head of US rates strategy at BNP Paribas. “My concern is that the Fed will once again seem to be more focused on the inflation part, or at least more than the market, and that has a big chance of surprising” investors.
What Bloomberg Economics Says…
“The SEP could see more officials anticipating fewer rate cuts this year: We see a close call between one or two 25 basis-point cuts. Even so, Fed Chair Jerome Powell will try to remain apolitical at the news conference, saying FOMC forecasts will incorporate the totality of Trump policies. We see a risk the Fed will be late to cut if a downturn hits.”
— Anna Wong, Stuart Paul, Eliza Winger, Estelle Ou and Chris Collins
For the full note, click here.
The Fed might traditionally respond to a slowdown in growth by cutting interest rates to shore up the economy. But with inflation still above the central bank’s 2% target, some economists wonder if policymakers would keep rates high despite a weakening in the economy in an effort to continue cooling price growth.
“The market has been pricing in sooner and more rate cuts because they are worried about the growth implications,” said Kathy Bostjancic, chief economist at Nationwide. “It’s possible, but I don’t think the Fed is ready at all to start to signal that.”
Press Conference
Powell’s press conference will be the central focus for investors, who seek reassurance the Fed will be ready to support the economy if necessary.
The Fed chief has repeatedly stressed there’s no need to be “in a hurry” to lower rates while the economy remains “in a good place.” He’s likely to reinforce that monetary policy is well positioned, allowing policymakers to wait for clearer signals of a weakening job market or a pickup in inflation.
Powell will likely be asked to clarify whether he and his colleagues see tariffs as a one-off or a persistent driver of inflation. He’s also likely to field questions about a decline in bond yields and stock prices, which saw a correction when the S&P 500 plunged 10%.
Analysts will also be watching for his assessment of deteriorating consumer sentiment and rising inflation expectations. A closely watched measure of long-term price expectations climbed in March for a third month, to a more than three-decade high. So far, central bankers have said longer-term inflation estimates remain well anchored.
Balance Sheet
The Fed could soon slow down the pace at which it’s letting assets mature off its balance sheet — a process known as quantitative tightening — or pause it altogether amid concern that debt-ceiling uncertainty could cause frictions in the Treasury market.
A number of economists and analysts expect an announcement on changes to balance-sheet policy in the next few months, perhaps as early as this week.
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