The Federal Reserve left its key interest rate unchanged while penciling in a half-percentage-point in rate cuts later this year. The S&P 500 rallied as Chairman Jerome Powell downplayed the inflation impact of Trump tariffs as "transitory."
Fed policymakers also downgraded their predictions for economic growth, while raising their forecasts for unemployment. That combination of slower growth and a higher jobless rate may prove conducive to rate cuts, as long as the Fed doesn't see risk that a tariff-led rise in inflation could have staying power.
Fed Projections Still See Two Rate Cuts In 2025
The new quarterly projections show the Fed's key interest rate ending the year at 3.9%, which implies two quarter-point rate cuts. That's unchanged from December's forecast.
The Fed's primary inflation rate, the core PCE price index, is forecast to end 2025 at 2.8%, up from the 2.5% forecast in December. However, forecasts for core inflation in 2026 and 2027 were unchanged at 2.2% and 2%, respectively, indicating a transitory increase.
Unemployment is seen rising to 4.4% this year, above the prior 4.3% forecast and current 4.1% rate.
The Fed's quarterly projections show the economy growing 1.7% this year, down from December's 2.1% forecast. The Fed is penciling in 1.8% GDP growth in 2026 and 2027.
Trump Tariffs' Inflation Seen Transitory
The base case is that Trump tariffs will have a "transitory" effect, raising inflation this year, but not in the longer term, Powell said.
If there's an inflationary impulse that's going to go away on its own, it would be the wrong policy to tighten, Powell said. That's partly because the lagged impact of Fed tightening may hit the economy as tariff inflation is already abating.
Powell said that market-based inflation expectations don't show a sustained increase in inflation. Powell explained that the Fed is particularly focused on long-term inflation expectations. If market participants expect inflation to be higher five years from now, that would be a concern, he said, but that's not what markets are showing.
Fed Projections Aren't Entirely Dovish
On one hand, higher unemployment, slower growth and a transitory rise in inflation should provide room for rate cuts from what Powell said continues to be a restrictive level.
However, the Fed's policy outlook got a bit more hawkish below the surface. In December, only four of 19 policymakers expected fewer than 50 basis points in rate cuts. Now, eight of 19 policymakers see no more than 25 basis points in cuts, with half of those expecting no cuts.
Should You Trust Fed's Forecast?
Powell offered a mixed message, saying that the solid economic backdrop puts the Fed in a good position to "wait for greater clarity" on the Trump agenda before adjusting policy.
Powell explained that the "net effect" of Trump's trade, fiscal, regulatory and immigration policies is what matters for monetary policy. However, Trump's massive package of tax and spending cuts may not work its way through Congress until August or September.
Further, the Fed's projection of 2.8% core inflation this year has to be taken with a grain of salt, given that President Trump's big unveiling of reciprocal tariffs is still to come on April 2.
Hard Vs. Soft Data
Powell noted a recent "moderation in consumer spending. He also said surveys show "heightened uncertainty about the economic outlook" among consumers and businesses, with tariffs as "a driving factor" of that uncertainty.
If depressed confidence is going to weigh on the economy, "we'll know it very quickly," he said.
Powell said hard economic data, as opposed to survey data, still looks "pretty solid." The relationship between survey data and economic data hasn't been very tight in the past, Powell said. Sometimes people go buy a car even if they say they're worried, he said. But the Fed is watching very closely to see what happens this time.
Fed Rate-Cut Odds
After Powell's presentation, markets are now pricing in 19% odds of a rate cut at the May 7 Fed meeting and 66% odds of a June 18 rate cut, both little changed from Tuesday, according to CME Group's FedWatch tool.
However, odds that the Fed will cut its key rate by 75 basis points this year rose to 53% from 43% a day earlier.
S&P 500
The S&P 500 climbed 1.1% in Wednesday stock market action, giving up some gains in the final hour of trading. As of Wednesday's close, the S&P 500 stands 7.6% below its record closing high on Feb. 19.
The S&P 500 is below its 200-day line and some distance from its 50-day.
A market rally attempt continues for the S&P 500 and other major indexes, but they have not yet staged a follow-through day.
Be sure to read IBD's The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.
