Benchmark Rate Held at 4.25~4.5% for Second Time
Fed Maintains Two Expected Rate Cuts This Year
2024 Growth Forecast Lowered from 2.1% to 1.7%
Core PCE Inflation Outlook Raised from 2.5% to 2.8%
The U.S. Federal Reserve (Fed) has, as expected, kept the benchmark interest rate unchanged for the second consecutive time. The number of expected rate cuts this year remains at two. Amid growing fears of stagflation (rising prices alongside economic slowdown) triggered by Trump, the Fed lowered its economic growth forecast for this year while raising its inflation expectations, partially reflecting these concerns.
On the 19th (local time), the Fed announced after the Federal Open Market Committee (FOMC) regular meeting that it had unanimously decided to keep the federal funds rate at 4.25?4.5% per annum. This marks the second consecutive hold following January. As a result, the interest rate gap with South Korea remains at 1.75 percentage points at the upper bound.
In the policy statement released that day, the Fed said, "Uncertainty surrounding the economic outlook has increased," and "The Committee is paying close attention to risks on both sides of its dual mandate of price stability and maximum employment."
The most notable point is that the Fed, for the first time since the inauguration of Donald Trump's second term administration, updated its Summary of Economic Projections (SEP), which partially confirmed recent market concerns about stagflation. The Fed lowered its GDP growth forecast for this year from 2.1% to 1.7%, and raised the year-end unemployment rate forecast from 4.3% to 4.4%. Conversely, the inflation forecast, based on the core Personal Consumption Expenditures (PCE) price index, which the Fed prioritizes most, was raised from 2.5% to 2.8%. Amid growing market concerns about persistent high inflation and economic recession due to Trump’s second-term tariff policies, the Fed also expects the economy to slow further this year and inflation to rise more than initially anticipated.
Although inflation expectations were raised and growth forecasts lowered, the outlook for rate cuts this year remains at two. Through the new dot plot released that day, the Fed presented the median year-end interest rate forecast for this year at 3.9%, unchanged from before. Considering the current rate of 4.25?4.5%, this implies two 0.25 percentage point rate cuts this year. Previously, in December last year, the Fed had lowered the median year-end rate forecast for 2025 from 4.4% to 3.9%, significantly reducing the expected number of rate cuts from four times (a total of 1.0 percentage point) to two times (a total of 0.5 percentage point). The Fed also maintained the median year-end rate forecasts for 2026 and 2027 at 3.4% and 3.1%, respectively.
Additionally, the Fed decided to slow the pace of quantitative tightening. Currently, the Fed is conducting quantitative tightening by not reinvesting up to $25 billion of maturing Treasury securities each month, but starting next month, it will reduce the monthly cap on Treasury quantitative tightening to $5 billion.
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
