Fed Holds Rates Steady, Signals Cuts Amid Rising Inflation

In a widely anticipated move, the Federal Reserve kept its benchmark interest rate unchanged at around 4.3% on Wednesday but signaled potential rate cuts later this year, highlighting policymakers’ growing concerns over slowing economic growth and persistent inflation pressures. Fed Chair Jerome Powell acknowledged that external economists have revised upward their estimates of a recession in recent months, but he maintained the likelihood remains moderate. Powell also emphasized that the historical baseline probability of a recession stands consistently around 25%, reflecting inherent uncertainty in economic forecasting.

This article was originally published by Schiff Gold.

The Fed’s cautious stance stems partly from rising inflation, now projected to tick upward slightly to 2.7% by year’s end, compared to the current 2.5%. Powell specifically pointed to trade tariffs imposed by former President Donald Trump as a significant driver of inflationary pressure, though he suggested their effects may eventually subside. Speaking of the Fed’s 2% inflation target, Powell stated, “I think we were getting closer and closer… With the arrival of the tariff inflation, further progress may be delayed.” Despite these reassurances, the central bank’s projections reflect a broader economic slowdown, lowering expected GDP growth to 1.7% this year from nearly 2.8% in 2024, and staying muted at 1.8% through 2026.

The Fed’s internal debate on monetary policy direction appears increasingly divided. Among the 19 Federal Reserve officials, eight currently foresee at most one rate cut—or none at all—in 2025, doubling the number who held that view in December. Additionally, Federal Reserve Governor Christopher Waller publicly dissented against the Fed’s move to slow the reduction pace of its Treasury holdings from $25 billion to just $5 billion per month, demonstrating internal disagreements on monetary policy actions.

Financial markets reacted positively to the Fed’s more dovish rate signals. Equities rallied sharply during Powell’s remarks, with the Nasdaq Composite gaining 1.7%, the S&P 500 up 1.3%, and the Dow Jones Industrial Average surging over 400 points. These gains underscore investor optimism that the Fed might ease monetary conditions despite lingering inflationary risks. However, analysts caution investors not to underestimate broader economic headwinds. Barclays recently slashed its 2025 U.S. growth forecast significantly, now predicting a mere 0.7% expansion compared to last year’s robust 2.5% expectation. Furthermore, labor markets also show signs of weakening, as Fed officials anticipate unemployment rising modestly from 4.1% to 4.4% by year’s end.

In reaction to economic uncertainty, gold prices surged to over $3,050 per ounce on Wednesday. As the Fed’s latest messaging highlights mixed signals on recession risks, inflation, and monetary policy outlook, investors seeking reliable protection from economic turbulence may continue turning toward traditional safe havens.