What to expect from the Federal Reserve’s interest rate decision on Wednesday

Takeaways

• The Federal Reserve is widely expected to keep its interest rate flat at Wednesday's policy meeting.
• Fed officials are reluctant to make any monetary policy moves while they wait to see what President Donald Trump's economic policies will be enacted and how they'll affect the economy.
• If the economy nosedives because of Trump's tariffs, the Fed would likely have to cut interest rates to support the job market.
• Forecasters believe that a recession is a possibility, albeit one that is unlikely.

In an uncertain economy, one thing is almost certain: the Federal Reserve’s policy committee will keep its key interest rate the same when it meets on Tuesday and Wednesday.

According to CME Group’s FedWatch, which forecasts rate changes based on fed fund futures trading, financial markets are overwhelmingly betting that the Fed will maintain its benchmark federal funds at a range between 4.25% and 4.5%. This would be the second time in a row that the Federal Open Market Committee remained steadfast. The FOMC held the rate at the same level in January, after reducing it by one percentage point during its previous three meetings.

In recent speeches Fed officials, such as Chairman Jerome Powell, indicated that they were taking a “wait-and-see” approach to interest rates, given the uncertainty surrounding so many economic policies. For one thing, the Fed is reluctant to act until policymakers know more about which of President Donald Trump’s tariff threats he will actually impose on foreign countries—and whether those tariffs will push up inflation, drag down the economy, or both.

How did we get here?

The Fed kept its influential interest rate at the highest level in two decades for more than a decade after it increased it sharply in 2022, to counteract a post-pandemic surge in inflation. Higher interest rates aim to stifle the inflation and slow down the economy by pushing interest rates up on all types of loans.

Late last year, central bankers cut the fed funds rate after inflation cooled down closer to the Fed's goal of a 2% annual rate. But a resurgence of stubborn inflation in recent months, plus the lack of clarity about Trump's economic policies, has made the Fed reluctant to make any more moves for the time being.

Fed Chair Jerome Powell confirmed this attitude in a recent speech when he said that he and his colleagues are not in a hurry to reduce rates.

What's Next for the Federal Reserve's Influential Interest Rate?

In the face of “uncertainty”, the Fed could reveal little about its future actions in its official announcement or Powell’s subsequent press conference.

Matthew Luzzetti is the chief US economist for Deutsche Bank. In a recent commentary, he wrote: “We expect the Fed will hold rates steady for a second consecutive meeting and, due to increased uncertainty, provide limited advice about the future policy path.”

Fed officials will also release their quarterly Summary of Economic Projections. In this document, FOMC members outline their expectations for the Fed Funds rate and key economic indicators in the months and years to come. The Deutsche Bank economists believe that officials will only jot down one rate reduction this year instead of the two they predicted the last time FOMC made projections, in December.

The Fed has a lot of questions, including whether the economy is at risk of slipping into a recession. Several economic indicators showed warning signs at first of the Trump era. In addition to the tariff talk that has policymakers worried, consumer confidence is down and U.S. household spending has decreased. On the other hand the job market is stable and inflation dropped unexpectedly fast in February.

In the face of these crosswinds, some analysts have increased the odds that a recession will occur in 2025. However, it is still highly unlikely. Goldman Sachs economists, for instance, increased the odds of a global recession in the coming year from 15% to 20%.

A downturn in the economy would lead the Fed to lower its interest rates to stimulate the economy. The central bank’s mandate is to maintain full-employment and keep inflation at bay.

Forecasters, however, see a risk of tariffs stoking inflation by pushing prices up on consumer goods. This would push the Fed to the opposite direction and keep interest rates high.

Financial markets bet that the Fed will start lowering rates again in June.