As anticipated by economists and investors, the US Federal Reserve (Fed) kept the federal funds target rate at 4.25% – 4.50%. Overall, the rate statement and the Summary of Economic Projections (SEP) aligned with expectations.

Rate Statement

For ease of reference, I have highlighted new additions to the statement in green and indicated sentence removals in red. As you can see, the Fed has explicitly noted an ‘increase’ in economic uncertainty and emphasised a reduction in the pace of Quantitative Tightening (QT) to US$5 billion per month.

Summary of Economic Projections

Unchanged from the December projections (2024), the federal funds rate is expected to remain at 3.9%, 3.4%, and 3.1% for 2025, 2026, and 2027, respectively. The longer-run rate also remains projected at 3.0%. Therefore, as anticipated, despite uncertainty surrounding US President Donald Trump’s policies, Fed members continue to predict two rate cuts this year, which closely aligns with the futures market (currently pricing in around 65 basis points of easing in 2025). However, one (hawkish) observation from the dot-plot is that, compared to just one Fed member forecasting no rate cuts this year in the December projections, today’s report indicated that four members anticipate no reductions.

Real GDP (Gross Domestic Product) was revised lower, as anticipated. Fed members project growth at 1.7% in 2025 (December projection: 2.1%) and 1.8% for 2026 and 2027, respectively (down from 2.0% and 1.9% in December’s projections).

The unemployment rate is expected to tick slightly higher in 2025 to 4.4% (December projection: 4.3%), though no revision was seen for 2026 or 2027 – estimated to remain at 4.3% in both years.

As anticipated, PCE inflation (Personal Consumption Expenditures) has been revised upward for 2025 and 2026 to 2.7% (December projection: 2.5%) and 2.2% (December projection: 2.1%), respectively, and is expected to reach the Fed’s inflation target of 2.0% by 2027.

Core PCE inflation was revised higher for 2025 to 2.8% (December projection: 2.5%), with forecasts for 2026 and 2027 remaining unchanged at 2.2% and 2.0%, respectively.

Fed Chairman Jerome Powell’s Press Conference

Powell stated in his opening remarks at today’s press conference that the economy and the labour market are robust. He further reiterated that inflation remains somewhat elevated, and mentioned that the decision to slow the pace of quantitative tightening was a ‘technical decision’ made by the Fed.

The Fed Chairman acknowledged the challenge of forecasting in the current climate but also reiterated that the Fed is ‘not in a hurry’ to cut rates and ‘will await further clarity’ as the economy remains ‘well positioned’. He also mentioned that the Fed could ‘maintain policy restraint for longer’ if the economy remains strong. Several desks have commented on a potentially ‘lost Fed’ in this environment. On the one hand, the economy is in a reasonably ‘good place’; on the other hand, the Fed is not in the best position to make any logical forecasts amid the erratic on-and-off tariff policies from the Trump administration. Powell reiterated this point, noting that knowing how events will unfold is difficult.

The jobs market is ‘not a significant source of inflationary pressures’, and Powell added that several indicators ‘suggest that conditions in the labour market are broadly in balance’. Regarding inflation, you will have noted that Powell used the term ‘Transitory’, which is understandable given the latest SEP indicating inflation easing beyond 2025 in both headline and core PCE readings. Nevertheless, Powell emphasised that progress on inflation could be delayed due to tariffs, but he stated that longer-term inflation expectations remain consistent with the Fed’s inflation target of 2.0%.

Powell acknowledged that inflation has been rising, ‘partly in response to tariffs’. He stated that it is too early to observe a significant impact on economic data due to tariffs. The Fed Chief noted that hard data remains strong, but soft data is weak. Powell appeared to emphasise hard data, yet the question for some analysts is whether the soft data indicates a sign of things to come. Regarding recessionary risks, Powell believes that although they have increased, they ‘are not high’.

As of writing, the US Dollar Index (USD) is positive, albeit considerably off best levels, with US Treasury yields also paring their earlier advance. The S&P 500 is trading 1.0% in the green and pushing towards the 200-day simple moving average of 5,746, and spot gold is up 0.4% versus the US dollar (XAU/USD) and recently refreshed record highs of US$3,051.

Written by FP Markets Market Analyst Aaron Hill

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