The Federal Reserve on Wednesday left interest rates unchanged amid mounting uncertainty over how the Iran war will impact the economy and in turn the central bank’s approach to monetary policy, raising questions over whether any rate cuts will occur this year.
The Fed’s monetary policy panel, known as the Federal Open Market Committee (FOMC), voted 11-1 to leave the benchmark federal funds rate unchanged at a range of 3.5% to 3.75%. It marked the second straight meeting with rates being held steady after three successive 25-basis-point cuts in September, October and December to end last year.
Policymakers released a summary of economic projections (SEP), which showed that the median projection for interest rates sees just one 25 basis point cut the rest of this year followed by a single cut of that size in 2027.
“In our SEP, FOMC participants wrote down their individual assessments of an appropriate path for the federal funds rate under what each participant judges to be the most likely scenario for the economy,” Federal Reserve Chair Jerome Powell said. “The median participant projects that the appropriate level of the federal funds rate will be 3.4% at the end of this year and 3.1% at the end of next year, unchanged from December.”
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“As is always the case, these individual forecasts are subject to uncertainty and they are not a committee plan or decision,” Powell added.
During the post-announcement press conference, Powell was asked what officials are seeing that led them to project a cut despite higher forecasts for both inflation and unchanged projections for the unemployment rate and economic growth.
The SEP showed policymakers projected that the personal consumption expenditures (PCE) index – the Fed’s preferred inflation gauge – will be 2.7% at the end of this year, well above the central bank’s 2% target. That’s up from 2.4% in the Fed’s prior projection in December.
Core PCE, which excludes volatile measurements of food and energy, was also revised up to 2.7% at the end of this year. The previous projection had it at 2.5%.
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“There are 19 people, and so 19 reasons, 19 individual submissions,” Powell said. “If you notice, the median didn’t change, but there was actually a meaningful amount of movement toward fewer cuts by people, so four or five people went from two cuts to one cut.”
“Essentially, the forecast is that we will be making some progress on inflation, not as much as we had hoped, but some progress on inflation,” Powell said. “It should come as we start to see in the middle of the year progress on tariffs going through once and then tariff inflation coming down. We should be seeing that.”
“And you know, the rate forecast is conditional on the performance of the economy, so if we don’t see that progress, then you won’t see the rate cut,” he explained.
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The market responded to the Fed’s projection by pulling back expectations surrounding interest rate cuts this year, which were previously expected to begin as early as June.
The CME FedWatch tool showed an 89.2% probability that rates will remain at their current level following the Fed’s June meeting in the wake of today’s announcement. That’s up from 79.5% yesterday, 62.8% a week ago and 37.8% last month – while the tool also now shows a 3.8% chance of a 25 basis point hike in June, up from zero a month ago.
The market now sees it being more likely than not that the Fed will leave rates unchanged through the end of this year.
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The CME FedWatch tool shows a 51.3% chance of rates being at their current range after the Fed’s December meeting – up from 23.5% a week ago and 4.9% last month.
Probabilities for December show a 35.7% chance of one 25 basis point reduction by then, while the odds of a second cut between now and then have fallen to 9.5% from 32.5% a month ago.
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