Federal Reserve keeps interest rate unchanged, sees slower growth and higher inflation

The Federal Reserve kept its benchmark interest rate unchanged Wednesday and signaled that it still expects to cut rates twice this year, though it said the outlook is more uncertain.

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 also expects the unemployment rate to tick higher, to 4.4%, by the end of this year. Policymakers also expect inflation will pick up slightly this year, to 2.7% from its current level of 2.5%. Both are above the central bank’s 2% target.

“Uncertainty around the economic outlook has increased,” the Fed said in a statement released after its two-day meeting.

The 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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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.

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 Treasuries lower than they would have been otherwise. Yields fell slightly in Treasury markets.

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So far, growth appears to be slowing in the first three months of the year but the impact of tariffs on inflation hasn’t yet materialized. But economists at Goldman Sachs forecast that the import taxes will push inflation to 3% by the end of this year.

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 expectat higher inflation, they may take steps, such as accelerating purchases, that can push prices higher.

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.

Many economists have sharply reduced their forecasts for growth this year, with Barclays, a bank, now forecasting growth of just 0.7%, down from 2.5% in 2024. And economists at Goldman Sachs now expect inflation — excluding the volatile food and energy categories — will tick higher to 3% by the end of this year, up from its current level of 2.6%.