Fed holds rates, slows balance sheet reduction, downgrades growth outlook

As widely expected, FOMC kept interest rates steady at 4.25-4.50%. At the same time, Fed announced a key shift in its quantitative tightening strategy, stating that beginning in April, it will slow the pace of balance sheet reduction from USD 25B to USD 5B.

In its accompanying statement, Fed acknowledged that recent economic data continues to indicate “solid” expansion, with “low” unemployment and “solid” labor market conditions. Meanwhile, Fed noted that inflation remains “somewhat elevated”, reinforcing the need for cautious policymaking.

The updated economic projections showed no change in Fed’s rate-cut outlook, with the median federal funds rate projection still pointing to just two cuts this year, leaving rates at 3.9% by the end of 2025. Looking further ahead, Fed continues to see rates at 3.4% by the end of 2026 and 3.1% by the end of 2027

Fed’s GDP growth forecasts were revised downward, reflecting growing concerns over economic headwinds. The US economy is now expected to grow by just 1.7% in 2025, down from 2.1% in the previous forecast, while 2026 and 2027 growth projections were also slightly trimmed to 1.8%.

Meanwhile, core PCE inflation projections for 2025 were revised higher, from 2.5% to 2.8%, suggesting that price pressures may prove more persistent than previously anticipated. However, core inflation forecasts for 2026 and 2027 remained unchanged at 2.2% and 2.0%, respectively, signaling confidence that inflation will gradually trend back toward the 2% target.

Full FOMC statement here.

Full Fed SEP here.