The Federal Reserve has opted to keep interest rates between 4.25% and 4.5%, also announcing plans for two rate cuts in 2025 amid high inflation and economic growth.
Fed Slows Balance Sheet Reduction
The Fed is not just holding rates steady; it’s also adjusting the pace of its $7.5 trillion balance sheet reduction. Starting in April, the bank will allow only $5 billion in Treasury holdings to mature each month, a significant cut from the previous $25 billion, while the $35 billion cap on mortgage-backed securities remains unchanged. This move provides the central bank with more flexibility. Fed Governor Christopher Waller was the sole dissenting official, preferring to maintain the current pace of quantitative tightening.
Divergent Views Among Fed Officials
The dot plot, which reveals the rate expectations of Federal Reserve officials, showed changes as four policymakers now foresee no rate cuts in 2025, up from just one at the last meeting. However, most still expect two rate cuts next year, two more in 2026, and one in 2027.
Market Context and Implications
Market attention is focused on the Fed’s decisions amid the start of Donald Trump's second presidential term, which brings increased trade tensions. His administration has levied tariffs on steel, aluminum, and other imports, with plans for more in April. Recent surveys indicate consumers are anticipating higher inflation due to these policies. Meanwhile, retail spending rose in February but fell short of expectations.
The Fed's meeting outcomes indicate that despite steady economic growth and low unemployment, the central bank is prepared to reconsider its policy in response to changing market conditions and inflation.
