The US Federal Reserve chose to keep interest rates unchanged Wednesday, noting that “uncertainty around the economic outlook has increased”. The target range for the federal funds rate remains at 4.25 to 4.5 per cent. While the central bank signalled the possibility of two interest rate cuts during the course of this year, Chairman Jerome Powell struck a note of caution, saying, “We’re not going to be in any hurry to move.” He also said that the “current policy stance is well-positioned to deal with the risks and uncertainties we face… (and that) the right thing to do is to wait here for greater clarity about what the economy is doing”.
The projections released by the Fed, which point towards slower economic growth, higher inflation and unemployment, underline the challenging environment in which the central bank is operating. In December, (median) projections of GDP growth in 2025 stood at 2.1 per cent. In the latest meeting, these were revised down to 1.7 per cent. Alongside, inflation is now expected to pick up, touching 2.7 per cent, up from the earlier assessment of 2.5 per cent. And the unemployment rate is expected to inch upwards to 4.4 per cent, from 4.3 per cent earlier. In recent weeks, fears have been voiced of a deeper economic slowdown. Sentiment has weakened and there is considerable uncertainty over how US President Donald Trump’s policies, especially on tariffs, deficits and immigration, will play out, and their impact on the broader economy. The issue of reciprocal tariffs, to be effective from April 2, is weighing heavy. This uncertainty will impact household and firm spending. In February, The Conference Board’s consumer confidence index fell to 98.3, while the uncertainty index of the St Louis Fed has been edging upwards. Powell echoed the sentiment, saying that there is “just really high uncertainty. What would you write down?” (when making projections). “I mean it’s just… really hard to know how this is going to work out.” The Atlanta Fed’s GDPNow model has pegged US GDP growth at -1.8 per cent in the first quarter of 2025 (seasonally adjusted annual rate as on March 18).
Trump was quick to criticise the Fed’s policy stance. He posted on a social media platform Wednesday: “The Fed would be MUCH better off CUTTING RATES as US tariffs start to transition (ease!) their way into the economy. Do the right thing.” While Powell has sought to assert the Fed’s independence, the pressure from Trump is unlikely to abate. In an increasingly uncertain global environment, there may well be external considerations to factor in, but monetary policy in India should be driven by the domestic growth-inflation dynamics.
