The Fed has started the year with two consecutive pauses after cutting three straight times in the fourth quarter of 2024. The decision was widely expected, and the US Dollar has posted gains against most other major currencies on Thursday.
Fed Projects Lower Growth, Higher Inflation
The Fed statement noted that “economic activity has continued to expand at a solid pace” but also warned that “uncertainty around the economic outlook has increased”. In other words, the US economy is performing well, but there are possible dangers ahead.
The Fed revised its economic forecasts for 2024 and is projecting lower growth and higher inflation than the previous forecast in December. The core inflation forecast was revised to 2.8%, up from 2.5% in December, while GDP was revised to 1.7%, down from 1.3% in December.
At his press conference, Fed Chair Jerome Powell signaled that the Fed was projecting two rate cuts this year, but emphasized that the current economic forecasts were “highly uncertain”.
Why is the economic outlook so unclear? A key reason is the uncertainty over the Trump administration’s trade policy, which has sent the financial markets on a roller-coaster ride since Trump took office just two months ago. Trump has slapped tariffs on a host of countries, only to suspend and re-impose some of those tariffs, creating huge uncertainty in the financial markets and among trading partners of the US.
Powell noted that “a good part” of the higher inflation forecast was due to tariffs and said that the Fed would work on “separating nontariff inflation tariff inflation”. This will be a tricky task for the Fed, especially when Trump’s tariff policy has already proved itself to be erratic and unpredictable in the space of just two months.
US Dollar Records Gains, Stock Market Surges
The Fed Reserve’s decision to maintain rates boosted the US Dollar, while the US stock market soared, as investors were pleased that the Fed is still looking at two rate cuts this year.
The US dollar has posted gains on Thursday against all the major currencies with the exception of the Japanese yen, as USD/JPY is unchanged.
EUR/USD has declined 0.36% today and GBP/USD is down 0.26%. The US dollar has posted sharp gains against AUD/USD (0.76%) and NZD/USD (0.93%).
The stock markets rallied strongly on Wednesday in the aftermath of the Fed decision.
The S&P 500 Index climbed 60.63 points (1.08%) and closed at 5,675.29.
The Nasdaq 100 Index soared by 253.30 points (1.30%) and closed at 19,736.66.
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