Federal Reserve sees tariffs raising inflation this year, keeps key rate
unchanged
[March 20, 2025] By
CHRISTOPHER RUGABER
WASHINGTON (AP) — The Federal Reserve kept its benchmark interest rate
unchanged Wednesday and signaled that it still expects to cut rates
twice this year even as it sees inflation staying stubbornly elevated.
The Fed also now expects the economy to grow more slowly this year and
next than it did three months ago, according to a set of quarterly
economic projections also released Wednesday. It forecasts growth
falling to just 1.7% in 2025, down from 2.8% last year, and 1.8% in
2026. Policymakers also expect inflation will pick up slightly, to 2.7%
by the end of this year from its current level of 2.5%. Both are above
the central bank’s 2% target.
Even though the Fed maintained its forecast for two cuts, economists
noted that under the surface there were signs that the central bank
could stay on hold for some time. That is likely to keep borrowing costs
for mortgages, auto loans, and credit cards unchanged in the coming
months.
Eight of the 19 Fed officials said they see only one or zero rate
reductions this year, up from just four in December.
“It will be harder for them to cut rates this year with inflation moving
sideways,” said Michael Gapen, an economist at Morgan Stanley.
Fed Chair Jerome Powell, at a news conference, said that President
Donald Trump's tariffs have started to push up inflation and would
likely stall the progress the central bank has seen in reducing
inflation since its peak in 2022.
“I think we were getting closer and closer" to price stability, Powell
said. "I wouldn’t say we were at that. ... I do think with the arrival
of the tariff inflation, further progress may be delayed.”
On his Truth Social platform late Wednesday, Trump posted: “The Fed
would be MUCH better off CUTTING RATES as U.S. Tariffs start to
transition (ease!) their way into the economy. Do the right thing.”
Powell added that the Fed still expects inflation to get back to nearly
2% by the end of next year. Tariffs could just create a one-time
increase in prices, he said, rather than an ongoing boost to inflation.
And in some cases, the Fed can simply “look through” a temporary price
rise, rather than respond by raising rates, Powell added.
Those comments appeared to please investors, and the S&P 500 stock index
rose 1% Wednesday afternoon.
Luke Tilley, chief economist at Wilmington Trust, said Powell appeared
less alarmed about the impact of tariffs compared to the Fed's previous
meeting in January.
“They're talking about tariffs in a totally different way,” he said.
Powell acknowledged that the Fed initially thought inflation coming out
of the pandemic would be temporary, which led it to delay raising rates
to combat higher prices. But he added that in this case, it could be a
“different situation.”
“But...we really can’t know that," he added, noting that uncertainty is
enveloping the economy. "We’re going to have to see how things actually
work out.”
Fed policymakers also expect the unemployment rate to tick higher, to
4.4%, by the end of this year, from 4.1% now.
The economic projections underscore the tight spot the Fed may find
itself in this year: Higher inflation typically would lead the Fed to
keep its key rate elevated, or even raise rates. On the other hand,
slower growth and higher unemployment would often cause the Fed to cut
rates to spur more borrowing and spending and lift the economy.
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Federal Reserve Chair Jerome Powell speaks during a news conference
after the Federal Open Market Committee meeting, Wednesday, March
19, 2025, at the Federal Reserve in Washington. (AP Photo/Jacquelyn
Martin)
 It is the second meeting in a row
that the Fed has kept its interest rate at about 4.3% as the central
bank has moved to the sidelines as it evaluates the impact of the
Trump administration’s policies on the economy. Economists forecast
that tariffs will likely push up inflation, at least temporarily.
But other policies, such as deregulation, could lower costs and cool
inflation.
Powell acknowledged that many surveys of businesses and consumers
have shown rising concern about the economic outlook. Yet he noted
that the unemployment rate remains low and the economy is still
expanding.
“We do understand that sentiment has fallen off pretty sharply but
economic activity has not yet," Powell said. “The economy seems to
be healthy.”
Powell underscored that uncertainty around the economy's outlook is
“unusually elevated” and said that the Fed is prepared to be patient
and see how the economy evolves before making further moves.
“We’re not going to be in any hurry to move,” he said. "We’re well
positioned to wait for further clarity and not in any hurry.”
The Fed also said it would slow the rate at which it is reducing its
Treasury holdings, which grew massively during and after the
pandemic. Previously it had allowed $25 billion of Treasurys to
mature each month without reinvesting the proceeds. Now it will
allow only $5 billion to mature each month.
In effect, the Fed will be reinvesting more of the expiring bonds
into new securities, which should keep interest rates on long-term
Treasurys lower than they would have been otherwise. Powell
characterized the change as a technical one and not related to its
interest-rate policies. Yields fell slightly in Treasury markets.
Federal Reserve governor Christopher Waller voted against the
decision to slow the Treasury purchases. The Fed is still allowing
$35 billion of mortgage-backed securities to mature each month.
Fed officials are closely watching measures of Americans’ inflation
expectations, which spiked in one survey released just last week.
Inflation expectations — essentially a measure of how worried people
are that inflation will get worse — are important to the Fed because
they can be self-fulfilling. If people expect higher inflation, they
may take steps, such as accelerating purchases, that can push prices
higher.
Yet Powell, in his news conference, downplayed that increase as an
“outlier” and said that in the long run, Americans still appear to
expect inflation to stay in check.
Retailers of both high-end and lower-cost goods have warned that
consumers are turning more cautious as they expect prices to rise
because of tariffs. Retail sales rose modestly last month after a
sharp fall in January. Homebuilders and contractors expect that home
construction and renovations will get more expensive.
___
AP Business Writer Alex Veiga in Los Angeles contributed to this
report.
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