Fed Cuts 2025 GDP Growth Forecast to 1.7%, Raises Unemployment Projection to 4.4%

The Federal Reserve concluded its latest policy meeting on Wednesday without implementing the interest rate cuts that President Donald Trump has been advocating for. The decision by the Fed comes at a time when new tariffs imposed by the Trump administration add complexity to the U.S. central bank’s economic outlook.

In its second of eight scheduled meetings for 2025, the Federal Open Market Committee (FOMC) announced it would maintain the target federal funds rate at 4.25% to 4.5%. This key rate, which influences borrowing costs across the economy, remains unchanged as the Fed assesses economic conditions.

Economic Outlook and Projections

In its statement, the Fed acknowledged increasing economic uncertainty but noted that “economic activity has continued to expand at a solid pace.”

More significant than the rate decision itself was the release of the Fed’s quarterly economic projections—commonly referred to as the “dot plot”—which provides forecasts for economic growth, inflation, unemployment, and interest rates through 2025 and beyond.

According to the latest median projections from Fed staff:

• Real GDP growth is expected to slow to 1.7% by the end of 2025, down from the 2.1% forecast in December.
• The unemployment rate is projected to rise slightly to 4.4%, compared to the previous estimate of 4.3%.
• Core inflation is now expected to end the year at 2.8%, up from the prior forecast of 2.5%.

Despite these shifts, the Fed held firm on its longer-term monetary policy outlook. The dot plot indicated that policymakers maintained their long-run federal funds rate projection at 3% and reaffirmed their year-end 2025 forecast of 3.9%, signaling an expectation for two rate cuts this year.

Market and Analyst Expectations of Fed Decision

The Fed’s decision was widely anticipated. Market analysts and traders had overwhelmingly predicted a hold. JPMorgan’s chief U.S. economist, Michael Feroli, noted ahead of the meeting that it “appears obvious” the Fed would opt to keep rates steady. The CME Group’s FedWatch Tool indicated a 99% probability that the Fed would maintain current rates.

Federal Reserve Chairman Jerome Powell addressed concerns over inflation during a press conference following the FOMC announcement. “Clearly…a good part of it is coming from tariffs,” Powell said, acknowledging that Trump’s import taxes are contributing to higher inflation expectations.

Though Trump originally appointed Powell as Fed chair in 2017, their relationship has been contentious. In 2019, Trump went as far as to label Powell an “enemy” over policy disagreements.

Trump’s Push for Fed Rate Cuts

On January 23, Trump called for an immediate interest rate cut. However, Wednesday’s meeting—the second since his return to office—made it clear that such a move is not imminent.

Despite the Fed’s decision to hold rates steady, Trump has celebrated the recent “big beautiful drop” in “interest rates,” likely referring to the decline in 10-year Treasury bond yields. These bonds serve as benchmarks for various types of loans, including mortgages, and their yields often reflect market expectations for longer-term Fed policy.

The Fed has kept interest rates at 4.25% to 4.5% since December, pausing its monetary policy easing. This marks a significant moment in an eventful decade for the central bank, which slashed rates to near zero in March 2020 to support the economy, then raised them to over 5% by mid-2023 to curb high inflation before beginning a rate-cutting cycle in September 2024.

Potential Paths to Rate Cuts Despite Inflation Risks

Over the past four years, the Fed has focused primarily on bringing inflation down toward its 2% target. However, many economists warn that Trump’s tariffs could push consumer prices higher in the near term.

Despite this challenge, the Fed could still move to cut rates if economic conditions warrant. Goldman Sachs’ chief U.S. economist, David Mericle, wrote in a recent note that the Fed’s decision-making will depend on how the tariff impact unfolds. He outlined two possible paths to rate cuts:

1. If tariffs result in lower-than-expected inflation, the Fed may be able to continue its planned rate-cutting cycle without disruption.
2. If tariffs cause more significant economic distress, the Fed could introduce stimulus-driven rate cuts, similar to those seen in 2008 and 2020.

Also Read: Federal Reserve Holds Interest Rates Steady, Stocks Rally On Prospect of Cuts