Will the Fed cut rates twice this year? Not necessarily

Significant changes announced and expected by the U.S. government on trade, immigration and fiscal spending mean that interest rate expectations may shift later this year.

The Federal Reserve announced on Wednesday (March 19) that it would keep interest rates unchanged. At the same time, the Summary of Economic Projections showed that interest rates may be cut twice this year, which is the same as the forecast made by the Federal Reserve at its meeting in December last year.

The Fed's wait-and-see stance was enough to provide a boost to Wall Street. The Dow Jones Industrial Average rose 384 points, or 0.9%, while the S&P 500 gained 1.1% and the Nasdaq Composite rose 1.4%.

However, investors should not be lulled into complacency by forecasts of two rate cuts, as significant changes announced and expected to be announced by the U.S. government on trade, immigration and fiscal spending mean that interest rate expectations could shift later this year.

In other words, the Fed may cut interest rates twice, more than twice, less than two, or not at all.

“Uncertainty is unusually high right now, and we have to wait and see how the situation plays out,” Fed Chairman Jerome Powell said at a news conference on Wednesday. “As far as I know, no one has much confidence in their forecasts.”

The interest rate futures market predicts the probability of interest rate cuts in the next four interest rate meetings

Note: The current target range for the federal funds rate is 4.25%-4.5%. Data as of 3:25 p.m. EST on March 19.

Source: CME Fed Watch

The Federal Reserve expects that the US economic growth will slow down this year and inflation will rise, that is, the Federal Reserve expects the US economy to fall into stagflation this year. The "Summary of Economic Projections" shows that the Federal Reserve has lowered its initial forecast of the US real GDP growth rate in 2025 from 2.1% in December last year to 1.7%, and expects the unemployment rate this year to be 4.4%, higher than the previous forecast of 4.3%.

The upward revisions to inflation expectations for 2025 and 2026 are particularly noteworthy. The Fed currently expects the PCE price index to rise by 2.7% by the end of this year, higher than the 2.5% expected in December last year. In addition, the Fed expects inflation to fall to the Fed's 2% target only in 2027.

The Fed may remain on the sidelines this year amid rising inflation expectations, but, despite the current stability in the labor market, Powell noted that a sharp increase in layoffs could quickly push up the unemployment rate, prompting the Fed to cut interest rates several times throughout the rest of the year.

In a press conference that lasted about 60 minutes, Powell mentioned the word "uncertainty" 18 times. Federal Reserve officials also pointed out in their official statement after the meeting that "uncertainty about the economic outlook has increased."

One of the reasons for the increased uncertainty in the economic outlook is the possible impact of Trump's tariffs. Powell said: "The Summary of Economic Projections does not show that inflation will decline further, and tariffs are the main reason."

Powell pointed out that tariffs leading to higher prices is the Fed's "baseline scenario", but the price increase caused by tariffs will be a "temporary phenomenon."

“If tariff-induced inflation disappears quickly without our taking action, then we can be less worried about inflation,” Powell said. “That will depend on whether tariff-induced inflation rises very quickly and whether inflation expectations are well controlled.”

Even without the impact of tariffs, the path for U.S. inflation this year is likely to be bumpy, Powell said, noting that a sharp rise in goods inflation in the first two months of the year outweighed any material impact from tariffs.

But Powell reiterated his confidence that the Fed's interest rate policy is well positioned to respond to changing economic dynamics. He said officials are focusing on "hard data" rather than "soft data" such as sentiment and confidence indicators that have fallen sharply in recent months.

“Hard data such as employment and consumer spending remain healthy,” Powell said.

Powell said the Fed was not ignoring the decline in consumer confidence, but the correlation between such data and economic activity had not been strong recently.

Powell also downplayed the significance of a sharp rise in longer-term inflation expectations in the University of Michigan’s consumer sentiment survey, calling it an “outlier.” He noted that inflation expectations measured in other surveys, including one conducted by the New York Federal Reserve, remain stable.

The Fed's wait-and-see approach to economic activity and inflation means it could be months before Fed officials get the clarity they seek.

Brian Coulton, chief economist at Fitch, commented: "The FOMC's sharp downward revision of its economic growth forecast and upward revision of its forecast for core inflation highlight the adverse impact of the sharp increase in US tariffs. Coupled with the recent survey showing a sharp increase in US households' inflation expectations over the next five years, the Fed's job will become more difficult, which also means that officials will stay on hold for quite some time and postpone the timing of further rate cuts."

Joe Brusuelas, chief economist at RSM, pointed out that the Fed's inaction may accelerate the impact of US trade policy. He said: "The Fed's wait-and-see stance will be challenged due to the high uncertainty of the magnitude and scope of the trade shock. The biggest lesson for companies, policymakers and investors from this interest rate decision is to avoid risks until the magnitude of the trade shock can be determined and new trade scales and financial rules are formulated."