Federal Reserve Sees Tariffs Raising Inflation This Year, Keeps Key Rate Unchanged

WASHINGTON — The Federal Reserve kept its benchmark interest rate unchanged Wednesday and signaled that it still expects to cut rates twice this year even as it sees inflation staying stubbornly elevated.

The Fed also now expects the economy to grow more slowly this year and next than it did three months ago, according to a set of quarterly economic projections also released Wednesday. It forecasts growth falling to just 1.7% in 2025, down from 2.8% last year, and 1.8% in 2026. Policymakers also expect inflation will pick up slightly, to 2.7% by the end of 2025 from its current level of 2.5%. Both are above the central bank’s 2% target.

Fed Chair Jerome Powell, at a news conference, said that President Donald Trump’s tariffs have started to push up inflation a bit and would likely stall out the progress the central bank has seen in reducing inflation in recent years.

“I think we were getting closer and closer” to price stability, Powell said. “I wouldn’t say we were at that. … I do think with the arrival of the tariff inflation, further progress may be delayed.” But he added that the Fed does still expect inflation to get back nearly 2% by the end of next year.

Fed policymakers also expect the unemployment rate to tick higher, to 4.4%, by the end of this year, from 4.1% now.

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The projections underscore the tight spot the Fed may find itself in this year: Higher inflation typically would lead the Fed to keep its key rate elevated, or even raise rates. On the other hand, slower growth and higher unemployment would often cause the Fed to cut rates to spur more borrowing and spending and lift the economy.

It is the second meeting in a row that the Fed has kept its interest rate at about 4.3% as the central bank has moved to the sidelines as it evaluates the impact of the Trump administration’s policies on the economy. Economists forecast that tariffs will likely push up inflation, at least temporarily. But other policies, such as deregulation, could lower costs and cool inflation.

Powell acknowledged that many surveys of businesses and consumers have shown rising concern about the economic outlook. Yet he noted that the unemployment rate remains low and the economy is still expanding.

“We do understand that sentiment has fallen off pretty sharply but economic activity has not yet,” Powell said. “The economy seems to be healthy.”

Powell underscored that uncertainty around the economy’s outlook is “unusually elevated” and said that the Fed is prepared to be patient and see how the economy evolves before making further moves.

“We’re not going to be in any hurry to move,” he said. “We’re well positioned to wait for further clarity and not in any hurry.”

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The Fed also said it would slow the rate at which it is reducing its Treasury holdings, which grew massively during and after the pandemic. Previously it had allowed $25 billion of Treasurys to mature each month without reinvesting the proceeds. Now it will allow only $5 billion to mature each month.

In effect, the Fed will be reinvesting more of the expiring bonds into new securities, which should keep interest rates on long-term Treasurys lower than they would have been otherwise. Powell characterized the change as a technical one and not related to its interest-rate policies. Yields fell slightly in Treasury markets.

Federal Reserve governor Christopher Waller voted against the decision to slow the Treasury purchases. The Fed is still allowing $35 billion of mortgage-backed securities to mature each month.

So far, growth appears to be slowing in the first three months of the year but the impact of tariffs on inflation hasn’t yet materialized. But economists at Goldman Sachs forecast that the import taxes will push inflation to 3% by the end of this year.

Fed officials are closely watching measures of Americans’ inflation expectations, which spiked in one survey released just last week. Inflation expectations — essentially a measure of how worried people are that inflation will get worse — are important to the Fed because they can be self-fulfilling. If people expect higher inflation, they may take steps, such as accelerating purchases, that can push prices higher.

Retailers of both high-end and lower-cost goods have warned that consumers are turning more cautious as they expect prices to rise because of tariffs. Retail sales rose modestly last month after a sharp fall in January. Homebuilders and contractors expect that home construction and renovations will get more expensive.

Many economists have sharply reduced their forecasts for growth this year, with Barclays, a bank, now forecasting growth of just 0.7%, down from 2.5% in 2024. And economists at Goldman Sachs now expect inflation — excluding the volatile food and energy categories — will tick higher to 3% by the end of this year, up from its current level of 2.6%.

AP Business Writer Alex Veiga in Los Angeles contributed to this report.