The Federal Reserve kept interest rates unchanged on Wednesday, as widely expected, but signaled plans to cut borrowing costs by half a percentage point by the end of the year. This decision comes amid slowing economic growth and expectations that inflation will eventually ease. Interestingly, despite the Trump administration’s recent push for tariffs, Fed officials actually raised their inflation forecast for the year. They now expect their preferred inflation gauge to hit 2.7% by year’s end, up from the 2.5% predicted in December. The Fed’s goal remains 2%. However, they also lowered their economic growth outlook for 2025 from 2.1% to 1.7% and anticipate a slight rise in unemployment.

In its statement, the Fed acknowledged growing uncertainties, saying the economic outlook has become more unclear. The policy rate remains in the 4.25%-4.50% range, and the Fed announced plans to slow the reduction of its balance sheet, a process known as quantitative tightening. Fed Governor Chris Waller opposed this particular decision.

Lower Growth, Higher Unemployment: The Fed’s outlook largely aligns with market expectations, reinforcing the idea that as inflation gradually slows, monetary policy will become more accommodative. However, the path forward may not be smooth. While the Fed’s projections reflect higher inflation—potentially linked to Trump’s tariff policies—it appears they are treating the price increases as temporary rather than a long-term concern.

Beyond this year, the Fed expects inflation to return to 2% by 2027, and interest rates to drop to around 3.1%, a level that neither stimulates nor restrains economic activity. Despite Trump’s claims of an upcoming economic "golden age" due to tariffs, immigration crackdowns, and deregulation, the Fed remains cautious. It forecasts growth of just 1.7% in 2025 and around 1.8% in 2026 and 2027, with unemployment projected to rise to 4.4% this year and remain slightly above 4% in the following years. Fed Chair Jerome Powell is set to address these projections in a press conference at 2:30 p.m. EDT, where he will provide further insights into the Fed’s stance and expectations.

Disclaimer: This image is taken from Business Standard.