The U.S. Federal Reserve (Fed) decided to keep the base interest rate unchanged at 4.25-4.50% on March 19th, maintaining its cautious approach to managing the economy. This decision followed a two-day Federal Open Market Committee (FOMC) meeting where the Fed acknowledged the continuing expansion of economic activity, a stable low unemployment rate, and a solid labour market. However, the Fed also noted that inflation had slightly risen, and uncertainty about the economic outlook had increased. This uncertainty is largely attributed to the economic effects of the “tariff war,” which began during the Trump administration and has had a significant impact on both U.S. and global economies.
The Fed’s statement emphasized its commitment to achieving maximum employment and a 2% inflation target in the long term, while also acknowledging the risks posed by the current economic landscape. The FOMC removed the previous language from its January meeting, which had stated that “risks to achieving the employment and inflation goals are broadly balanced.” This change reflects growing concerns about potential economic downturns and rising inflation due to tariffs imposed during Trump’s presidency.
The Fed’s decision to freeze interest rates for the second consecutive time is seen as a response to a slowing inflation relief trend and rising economic uncertainty caused by the ongoing tariff policies. As a result, the interest rate gap between the U.S. and Korea remains at 1.75 percentage points, based on the upper limit of the U.S. rate. The Fed’s quarterly economic outlook report, which included projections for the end of this year, indicated that the base rate (median) would be reduced to 3.9%, signalling two potential rate cuts of 0.25% each.
However, the number of Fed members predicting multiple rate cuts by 2025 has decreased, from 15 out of 19 in December to 11 in the latest projection. For these rate cuts to occur, there needs to be visible progress toward achieving the 2% inflation target or signs of a sharp economic downturn. The Fed’s outlook also shows that U.S. GDP growth will be slower than initially forecasted, with a revised estimate of 1.7% for this year, down from 2.1% in December. Inflation expectations have also risen, with the personal consumption expenditures (PCE) inflation forecast raised to 2.7%, while the core PCE inflation forecast increased to 2.8%.
Fed Chairman Jerome Powell acknowledged the role of President Trump’s tariff policies in driving inflation, suggesting that the current rise in inflation could be partly a response to tariffs. However, Powell noted that if the inflationary impact from the tariffs proves to be temporary, the Fed may overlook the inflation increase. Powell also downplayed the likelihood of a recession, despite a slight increase in recession predictions from some economic forecasters. He stated that while the probability of a recession has risen, it remains relatively low at this stage.