The Federal Reserve is holding steady on interest rates, but small decreases to rates are expected by the end of the year.
At the conclusion of the Federal Open Market Committee meeting Wednesday, it announced it would hold its target interest rates at 4.25 to 4.5 percent. It was the third straight meeting for the FOMC to decide to maintain the rate. It followed dropping rates by 100 basis points between August and December.
Federal Reserve Chairman Jerome Powell said the economy remains strong and the committee is working to understand the impact of the Trump Administration’s tariffs.
“Look ahead, the new administration is in the process of implementing significant policy changes in four distinct areas, trade, immigration, fiscal policy and immigration. It is the net effect of these policy changes that will matter for the economy and for the path of monetary policy. While there have been recent developments in some of these areas, especially trade policy, uncertainty around the changes and their effects around the economic outlook is high. As we parch the incoming information, we are focused on separating the signal from the noise as the outlook evolves,” Powell said.
He added there is uncertainty to how consumers will react to higher prices due to tariffs, pointing out the long-term price increases they have faced since the pandemic.
“We haven’t had real price stable fully re-established yet. And we have to keep that in mind,” Powell said. “You know, we hear that people are very reluctant to take on prices going up. At the same time, we hear that businesses are intending to pass many of these prices through. So it’s hard to know how this is going to work out.
“I would tell people the economy seems to be healthy. We understand that sentiment is quite negative at this time. And that probably has to do with turmoil at the beginning of an administration. It’s making big changes in areas of policy. And that’s probably part of it. I do think the underlying unhappiness people have the about economy, though, is more about the price level.”
Recent economic reports, show a slight drop in inflation and a tick-up in unemployment. The Bureau of Labor Statistics reported the annual inflation rate dropped in February to 2.8 percent. It was a small drop from the 3 percent rate in January. The total inflation numbers were less than all-items-less-food-and-energy index, which was at 3.1 percent.
The unemployment rate changed little at 4.1 percent in February. The economy added 151,000 jobs.
FOMC members did make forecasts at the meeting, predicting two interest rate cuts this year and for rates to be at 3.9 percent at the end of 2025 and 3.4 percent at the end of 2026. Those forecasts were unchanged from December.
“While these individual forecasts are always subject to uncertainty, as I noted, uncertainty today is unusually elevated and of course, these projections are not a committee plan or a decision,” Powell said. “Policy is not on a preset course. As the economy evolves we will adjust our policy stance in a manner that best promotes our maximum employment and price stability goals. If the economy remains strong and inflation does not continue to move stain reply toward 2 percent we can maintain policy restraint for longer. If the labor market were to weaken unexpectedly or if inflation were to fall unexpectedly we can ease inflation accordingly.”
He reiterated that the committee is not in a hurry to cut rates and will depend strictly on the market data.
Powell continues to believe that the possibility of a recession remains low.
“Forecasters have generally raised, a number of them have raised, their possibility of a recession somewhat. But still at relatively moderate levels. Still in the region of the traditional. Because they were extremely low. If you go back two months, people were saying that the likelihood of a recession was extremely low. So it has moved but it’s not high,” Powell said.
Auto rates remain high despite the cuts by the Fed in the past year. Cox Automotive reported used car rates were at 14.72 percent in early March and new car rates at 9.68 percent.
