US Federal Reserve Pauses Interest Rate Cuts Amid Tariff Uncertainty

Thursday 20 March 2025 - 12:09

By: Zahouani Ilham

US Federal Reserve Pauses Interest Rate Cuts Amid Tariff Uncertainty

The US Federal Reserve decided to maintain its interest rates on Wednesday, signaling caution amid ongoing economic uncertainty driven by President Donald Trump’s unpredictable tariff policies. The central bank kept its key lending rate steady between 4.25% and 4.50%. Along with this decision, the Fed lowered its growth forecast for 2025 while raising its inflation projections but still expects two rate cuts in the upcoming months, consistent with its December predictions.

Fed Chairman Jerome Powell noted that the current economic uncertainty is unusually high, attributing part of the recent inflation rise to the implementation of tariffs. Despite this, all three major Wall Street indices rose, and government bond yields fell after the announcement of a slower pace in reducing the Fed's balance sheet, which had expanded during the pandemic.

Fed Governor Christopher Waller dissented against the decision, expressing concern over the slowing of the balance sheet reduction process. Since Trump’s re-election, his administration has enacted and rolled back tariffs on key trading partners, such as China, Canada, and Mexico, creating a fluctuating economic environment. This instability has raised concerns about inflation and economic growth, further complicating the Fed's task of controlling inflation while ensuring a healthy job market.

Economists point out that while the American economy has shown robust performance recently, including a 2.5% rise in inflation and a strong labor market, the uncertainty surrounding Trump’s tariff policies has shifted the economic outlook. The Fed has lowered its growth forecast for 2025 to 1.7%, down from 2.1% in December, and also raised its inflation outlook for 2025 and 2026.

Despite the heightened risk of recession, Powell stated that while the likelihood has increased slightly, it remains relatively low. The White House has stated that more clarity on tariffs will come on April 2, the date Trump plans to impose retaliatory tariffs on US trade partners.