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Federal Holds Interest Rates & Blames Tariffs

wealthgram
wealthgram
3 Min Read
The Fed Holds Interest Rates & Blames Tariffs for Weak Economic Growth

At the March Federal Open Market Committee (FOMC) meeting, the Federal Reserve kept its key overnight lending rate, which directly impacts interest rates, in a range of 4.25% to 4.5% for the second consecutive meeting. This came after the Fed announced three consecutive interest rate cuts that began in September 2024. 

The markets priced in a zero chance of a rate cut. The Fed left U.S. interest rates unchanged due in large part to the impact tariffs will have on a slowing economy. On the plus side, the Fed said that while inflation remains elevated, it has come down over the past year.

In fact, over the last year the Fed has been credited with guiding the U.S. economy to a so-called “soft landing;” taming inflation without sending the economy into a downturn or recession. U.S. inflation peaked at 9.1% in June 2022 and has been falling since then to the current level of 2.8%, which is nearing the Fed’s goal of 2%. 

Fed chair Jerome Powell did acknowledge that inflation has become an issue again and that President Trump’s proposed tariffs against Canada, Mexico, and China, are partly to blame. 

How Is the U.S. Economy Doing?

While the Fed lowered its growth forecast for gross domestic product (GDP) to 1.7% from 2.1%, Powell did provide some reassurance to the markets about the fundamentals of the U.S. economy. 

“The economy is strong overall and has made significant progress toward our goals over the past two years,” Powell said. He also noted that the unemployment rate is low and the labour market is solid. 

Despite the economic uncertainty, the Fed is still expected to cut interest rates by another half percentage this year. The Fed, like most central banks, prefers to move its key lending rate in quarter percentage point increments; as a result, this points to two further rate cuts this year. That would take the federal fund rate down to a range of 3.75% to 4.0%.

In addition to the rate decision, the Fed said it was slowing the pace of quantitative tightening in April, reducing the monthly cap on U.S. Treasuries redemption from $25 billion to $5 billion. 

What does all of this mean for investors?

The FOMC meeting means investors need to review their portfolio, ensuring it provides diversified sources of income that are aligned with their financial goals. The portfolio should also leave room for investors to take advantage of any near and long-term opportunities that a trade war presents.

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