The Fed’s interest rate decision didn’t turn any heads on Wall Street but its economic projections hint at a dire economic scenario that investors have been stressing about in recent weeks.

At the conclusion of its policy meeting on Wednesday, the central bank held its benchmark rate steady at a range of 4.25%-4.50%, in line with what markets expected. However, its latest economic projections were a bit more jarring.

The Fed is now eyeing lower economic growth and higher inflation for 2025, a revision that’s kicked up fears of stagflation, a dire economic scenario that hasn’t been seen in decades.

According to the Fed’s Summary of Economic Projections, the median estimate among officials is for real GDP to grow 1.7% this year, down from the prior forecast of 2.1%. Policymakers also revised lower their growth expectations for 2026 and 2027, expecting real GDP to increase 1.8% in both years.

Personal consumption expenditures inflation, the Fed’s preferred inflation measure, is also expected to rise 2.7% this year, up from the prior forecast of 2.5%. Median inflation expectations for 2026 were also revised upwards, with Fed officials expecting prices to rise 2.2% next year, up from the prior 2.1% estimate.

Investors this year have been worried that stagflation could rears its head soon. About 71% of fund managers said they expected stagflation in the global economy over the next 12 months, according to a Bank of America survey published this week.

Bank of America Global Research

“As growth prospects falter and inflation remains sticky, we should expect investors to get more worried about stagflation,” Jeffrey Roach, chief economist at LPL Financial, said in a note. “If the Fed shifts focus to recession and growth fears, the committee could resume cutting rates to stimulate a faltering economy but they are in a tight spot given the uncertain impacts from a trade war.”

Goldman Sachs also noted the “stagflationary feel” in a note following the meeting.

“Revisions to FOMC members’ projections had a somewhat ‘stagflationary’ feel with forecasts for growth and inflation moving in opposite directions. For the time being, the Fed is in wait and see mode, as it monitors whether the recent growth slowdown develops into something more serious,” Whitney Watson, the co-chief investment officer of fixed income and liquidity solutions at Goldman Sachs Asset Management, said.

Fears of lower growth in particular have been at the heart of the stock market’s recent weakness. A day after President Donald Trump refused to rule out a recession in an interview, the market had its worst day in years, and slowing growth has also taken the wind out of the market’s hottest trades.

Rising uncertainty

Many FOMC members indicated that they felt uncertain about the latest growth and inflation forecasts. Seventeen out of 19 members said they believed PCE inflation could be higher than what was reflected in the March projections, while 18 out of 19 members said they believed risks to GDP growth were weighted to the downside.

Fed Chair Powell also acknowledged higher uncertainty stemming from some of Trump’s policies, especially regarding trade. “A good part” of recent inflationary pressures is attributable to tariff increases, though it’s difficult to pinpoint how much tariffs have stoked inflation, he said.

“While there have been recent developments in some of these areas, especially trade policy, uncertainty around the changes and their effects on the economic outlook is high,” Powell said. “We do not need to be in a hurry to adjust our policy stance, and we are well positioned to wait for greater clarity.”