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

In a widely anticipated decision, the Federal Reserve opted on Wednesday to keep its benchmark interest rates unchanged, while signaling potential reductions later this year. The Federal Open Market Committee (FOMC) held its key borrowing rate in the 4.25%-4.5% range, where it has remained since December. Financial markets had priced in almost no likelihood of a rate adjustment at this week’s two-day policy meeting.

The Fed’s decision comes amid growing concerns over the economic impact of recently imposed tariffs. Alongside maintaining rates, officials updated their economic projections through 2027 and adjusted the pace at which they are reducing bond holdings.

Projected Interest Rate Cuts Despite Tariff Uncertainty

Despite uncertainties surrounding President Donald Trump’s tariff policies and a broader fiscal strategy of tax cuts and deregulation, the Fed maintained its outlook for rate reductions. Officials project a total decrease of 0.5 percentage points through 2025, likely translating to two separate quarter-point cuts.

Investor sentiment was buoyed by the possibility of further rate cuts, with the Dow Jones Industrial Average surging over 400 points following the announcement. However, Federal Reserve Chair Jerome Powell underscored the Fed’s cautious stance in a press conference, emphasizing that interest rates would remain elevated if economic conditions warranted it.

“If the economy remains strong, and inflation does not continue to move sustainably toward 2%, we can maintain policy restraint for longer,” Powell said. “If the labor market were to weaken unexpectedly, or inflation were to fall more quickly than anticipated, we can ease policy accordingly.”

Interest Rates: Fed Acknowledges Rising Uncertainty

In its post-meeting statement, the FOMC noted an increasingly uncertain economic outlook.

“Uncertainty around the economic outlook has increased,” the statement read. “The Committee is attentive to the risks to both sides of its dual mandate.”

The Federal Reserve is tasked with maintaining full employment and stable prices. Powell acknowledged a “moderation in consumer spending” and cautioned that tariffs could exert upward pressure on prices. These trends, he suggested, contributed to the Fed’s more measured economic outlook.

The committee downgraded its economic growth forecast while revising inflation expectations upward. Officials now project GDP growth at 1.7% for 2025, a 0.4 percentage point reduction from December’s estimate. Meanwhile, core inflation is expected to rise at an annual rate of 2.8%, up 0.3 percentage points from the previous projection.

The Fed’s “dot plot,” which reflects officials’ rate expectations, indicated a shift toward a more cautious stance. In the December meeting, only one official foresaw no rate cuts in 2025, whereas four now anticipate rates staying unchanged. The outlook for subsequent years remained steady, with projections suggesting two rate cuts in 2026 and an additional cut in 2027 before stabilizing at a long-term rate of approximately 3%.

Fed Slows ‘Quantitative Tightening’ Measures

Beyond interest rates, the Fed also announced a slowdown in its balance sheet reduction, a process known as “quantitative tightening.”

Under the revised approach, the Fed will now allow only $5 billion in maturing Treasury securities to roll off its balance sheet each month, down from the previous $25 billion. However, the cap on mortgage-backed securities remains unchanged at $35 billion, a level rarely reached since the tightening process began.

Fed Governor Christopher Waller was the sole dissenting vote in the decision. While he supported keeping rates steady, he opposed scaling back the balance sheet reduction program.

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