Fed leaves rates unchanged, notes higher uncertainty

The Federal Reserve building in Washington, DC. Photo: Alex Wong/Getty Images.

The Federal Reserve left interest rates unchanged Wednesday while noting increased economic uncertainty and slashing growth forecasts, at a time when trade and other policy areas are in extreme flux.

Why it matters: With the economy showing pockets of weakness, the Fed is opting for a cautious approach, even as its leaders see risks ahead from a volatile policy environment.

Driving the news: The policy-setting Federal Open Market Committee left its federal funds rate target range at 4.25% to 4.5%, where it has been since December.

“Uncertainty around the economic outlook has increased,” the committee said in language newly added to its policy statement.
The median Fed official now anticipates 1.7% GDP growth this year, compared with 2.1% in December projections.
The median Fed official anticipates two interest rate cuts this year, the same as in December

The intrigue: The committee also announced that starting next month it will withdraw its pandemic-era support for the financial system more slowly than it has been.

Under the change to its “quantitative tightening” the Fed will allow the portfolio of Treasury securities on its balance sheet to fall by only $5 billion a month, not the current $25 billion.
That translates into a slight easing of the Fed’s monetary policy stance – and is good news for longer-term borrowing costs and the value of financial assets.
Governor Christopher Waller dissented from the change to balance sheet policy, while agreeing with leaving interest rates unchanged. It is only the second time a governor has dissented from a monetary policy action in the last two decades.

Between the lines: Fed officials have acknowledged the Trump administration’s broad set of policy changes — including tariffs, federal government cutbacks, deregulation, and restrictive immigration policy — will likely affect the economy.

But given deep uncertainty on how all those forces will net out in affecting the job market and inflation, the central bank’s leaders have opted for a wait-and-see stance.
It comes as a variety of survey-based indicators have pointed to incipient weakness in the economy, though broad measures like the unemployment rate have held up fine.

By the numbers: New economic projections reflect heightened worry on both growth and inflation. In addition to downgrading their GDP forecasts, the median official now sees inflation of 2.7% this year, up from 2.5% in December.

The median official saw the unemployment rate ticking up to 4.4% by year-end, compared to 4.3% in December.

What they’re saying: “As we parse the incoming information, we are focused on separating the signal from the noise as the outlook evolves,” Chair Jerome Powell said in a speech earlier this month.