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The Federal Reserve said Wednesday it was leaving interest rates unchanged, signaling it wanted further clarity on the direction of the economy before changing borrowing costs for businesses and consumers.
The Fed’s key federal funds rate, which serves as a benchmark for interest rates throughout the economy, will remain at approximately 4.5%.
Though it said current economic conditions were solid, it lowered its forecast of gross domestic product, a measure of the total value of all goods and services produced within the U.S., for the rest of the year from 2.1% in December to 1.7% while warning a key measure of inflation would now be closer to 3% than 2%.
Eighteen out of 19 policymakers now say there is increased risk that GDP will fall, compared with just five in December.
Meanwhile, 11 policymakers now say the unemployment rate could climb to as much as 4.5% this year, compared with only five previously.
“Uncertainty around the economic outlook has increased,” the Fed’s statement said.
A host of indicators, not to mention comments from Trump administration officials themselves, suggest that consumer spending and employers’ hiring are both slowing. After an initial burst of optimism upon Trump’s election, growth now looks to be more subdued. Meanwhile, federal workforce cuts by Elon Musk’s Department of Government Efficiency have also raised concerns about pressure on local economies, not to mention the ability of newly jobless workers to receive unemployment assistance.
“The Fed is as lost in the wilderness as the rest of us trying to decipher the continual shifts in economic policy from 1600 Pennsylvania Avenue,” Omair Sharif, managing director of Inflation Insights consultancy, said in a note to clients following Wednesday’s release.
The sweeping changes sought by the White House have also heightened uncertainty among investors. Last week, the S&P 500 slipped into correction territory, marking a 10% drop from its latest peak, for the first time in three years.
As surveys suggest consumer and business confidence is tanking, Trump and senior officials have changed their messaging since the campaign, warning consumers to brace for potential economic pain and declining to rule out the possibility of a recession. Trump has signaled the economy may be in for a period of “transition” as his policies take effect, while Treasury Secretary Scott Bessent recently said the U.S. must “detox” from its reliance on public spending.
The upheaval has created a more difficult backdrop for the Federal Reserve to navigate as it sets borrowing rates for the U.S. The central bank is charged by Congress with helping keep both unemployment and inflation low. Right now, both are fairly subdued. Yet, there are signs they are set to rise as the Trump administration looks to slash government agencies and impose steep new tariffs that major businesses have already warned shoppers could pay for.
“They are facing the most difficult challenge a central bank ever faces when the shock is both pushing up prices, in terms of imports, and reducing jobs, in terms of input costs,” former Treasury Secretary Larry Summers said in a post on X on Tuesday. “This is what tariffs do.”
Summers called the current trends in the economy a “stagflationary shock,” a view other economic commentators have echoed as a series of recent surveys show rising pessimism on everything from the job market to the pace of price increases.
So far, Fed Chair Jerome Powell has projected calm.
“Despite elevated levels of uncertainty, the U.S. economy continues to be in a good place,” Powell said earlier this month. “We do not need to be in a hurry, and are well positioned to wait for greater clarity.”
Still, investors sizing up the first two months of the Trump administration now believe the Fed is likely to cut interest rates at least twice this year to keep the economy on track. That’s a substantial shift compared with expectations at the outset of the year for as few as none at all.
“The Federal Reserve is likely to provide a policy boost [through lower interest rates] in the second half of 2025, if not earlier, as the economy weakens and as labor market cracks widen,” Seema Shah, chief global strategist at Principal Asset Management, said in a note to clients Monday.
That’s largely because the impact of Trump’s tariffs on prices remains to be seen, she said. Some analysts had earlier hoped his hard-line trade proposals would be used as bargaining chips with foreign governments, rather than actually implemented, but that view has since retreated.
“Signals from the Administration that they are not prepared to rule out recession are compounding the recent growth worry,” Goldman Sachs analysts said in a note to clients Sunday.
The White House may be waiting for the Fed to move first and lower rates to support Trump’s economic agenda, said Neil Dutta, head of U.S. economics at the consultancy Renaissance Macro. That could give the White House a target to blame for any adverse economic outcomes, he speculated in a note to clients Monday.
“If the Fed is hawkish, markets will probably weaken further; as a result, they’ll take some of the heat off the White House for the recent selloff in [the] equity market,” Dutta wrote. “If they are dovish, they may well encourage the administration to dial up the heat even more. Thus, it’s best to say nothing.”
Rob Wile is a Pulitzer Prize-winning journalist covering breaking business stories for NBCNews.com.
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