Fed keeps rates unchanged, waits for clarity
The Fed has left its key interest rates unchanged for the second time in a row.
Commerzbank Economic Research
03/20/2025
Fed leaves key interest rate unchanged...
As expected, the Fed has not changed its interest rates, so the target range for the federal funds rate remains at 4.25% to 4.50%. The Fed had already held steady at its last meeting in January. In the statement, the Fed notes that uncertainty around the economic outlook has increased. However, the pace of economic expansion is still described as “solid” despite the concerns about a recession that have arisen in the markets.
The Fed has also decided to slow the reduction of its bond portfolio (a process known as quantitative tightening, QT). The reduction of Treasury securities is now to be a maximum of $5 billion per month, down from $25 billion. This is in response to some tensions in the money market. The cap for mortgage-backed bonds remains at $35 billion per month. Since mid-2022, the Fed's bond holdings have been reduced by around $2 trillion to just under $6.5 trillion. Governor Waller voted against the slowdown in the portfolio reduction.
... updates its projections
The Fed has published the new projections of the FOMC meeting participants. They have become more pessimistic about inflation this year. Participants now expect a core inflation rate of 2.8% at the end of the year, up from 2.5% in December. This would also be a slight increase from the current level of 2.6%. However, the longer-term path to the 2% target has not changed in the Fed's opinion. At the same time, members expect less growth, especially this year (1.7% after 2.1% previously for the comparison of 2025 Q4 with 2024 Q4).
These new projections have consequences for the appropriate Fed funds rate path. At first glance, higher inflation and lower growth roughly offset each other, according to the FOMC participants. On average, the meeting participants continue to expect two interest rate cuts of 25 basis points each over the rest of the year. However, opinion has shifted noticeably towards less aggressive interest rate cuts. Now, only two members still expect interest rate cuts totaling 75 basis points or more for 2025. Before that, the figure was five. At the same time, more policymakers than before can imagine cutting interest rates only slightly or not at all.
For full text see attached PDF-Version.
