The Federal Reserve is set to extend its pause on interest rate cuts on Wednesday as President Trump’s aggressive approach to tariffs and other economic policies fuel extreme uncertainty about the outlook for inflation, growth and unemployment.
A decision to stand pat would keep interest rates at 4.25 percent to 4.5 percent, a level that was reached in December after a series of cuts in the second half of 2024.
Officials at the Fed are in wait-and-see mode, closely tracking the incoming data for signs that progress on inflation is picking back up after a period of stalling out, or that an otherwise solid labor market is starting to crack. What they also want is greater clarity on what exactly Mr. Trump has in store for the economy after a whirlwind of tariff announcements, government spending cuts and deportations.
The Fed will release its latest policy statement at 2 p.m. in Washington, after which Jerome H. Powell, the Fed chair, will hold a news conference.
Here is what to watch for on Wednesday.
How many cuts?
With the Fed’s pause well telegraphed, perhaps the most important part of the March meeting will come in the form of the central bank’s new “dot plot.”
Released quarterly, it tracks what officials expect will happen with interest rates for the rest of the year and over a longer time horizon. The dot plot aggregates forecasts from all 19 Fed officials, producing a median estimate that is regularly quoted as the clearest read of where the Fed expects interest rates to land.
The last time the dot plot was updated, in December, officials broadly expected two interest rate cuts this year, or a reduction of half a percentage point. That was significantly less than what was predicted in September, when officials saw a full percentage point decline.
Some economists are bracing for those expectations to be scaled back again, with officials signaling just one cut this year. Others think policymakers will stick with two cuts even as they raise their forecasts for inflation and lower those for growth because of Mr. Trump’s policies.
Officials are most focused on the net effect of the president’s plans, meaning they are not looking at any one policy individually but taking stock of how each interacts with and potentially offsets another. But given the extent of Mr. Trump’s tariff threats and what he has imposed so far on the country’s biggest trading partners, the global trade war has taken center stage in debates about the economy’s trajectory.
Financial markets are pinning their hopes that there will be at least two cuts next year as a weakening economy prompts the Fed to take action.
A new playbook for Trump?
With a global trade war now in full swing, the big question for the Fed is whether it will use a playbook that policymakers employed during the central bank’s last brush with large-scale tariffs in 2019, during the first Trump administration. Back then, the central bank ended up lowering interest rates by 0.75 percentage points as a form of insurance against mounting concerns about growth. Inflation at the time was subdued, giving officials flexibility to look past any temporary rise in consumer prices stemming from tariffs.
The Fed does not appear to have that luxury this time around. Part of the problem is that the tariffs Mr. Trump has put on the table are far more aggressive than anything proposed during his first term. They could lead to far higher prices for imports along with slowing exports as other countries retaliate with their own levies. Inflation, meanwhile, is still uncomfortably high, and progress in getting it back to the Fed’s 2 percent target has recently been very uneven.
At an event this month, Mr. Powell began to sketch out how the Fed would approach the situation.
“In a simple case where we know it’s a one-time thing, the textbook would say look through it,” he said, referring to a situation in which the Fed would not respond to a tariff-related price rise. But a “series” of bigger shocks when inflation is not yet under control could change that calculus, Mr. Powell warned at the University of Chicago Booth School of Business event.
“If the increases are larger, that would matter, and what really does matter is what is happening with longer-term inflation expectations. How persistent are the inflationary effects?”
Mr. Powell is likely to be asked more about the Fed’s trade war playbook this time around, as well as what the central bank will do if tariffs and Mr. Trump’s other policies do end up stoking inflation in a more persistent way while also slamming growth.
That is a recipe for what’s known as stagflation, a situation that would present a huge challenge for the Fed, which is responsible for keeping inflation low and stable and the labor market healthy.
Will the upcoming debt limit fight be a factor?
While most of the focus remains on the Fed’s decisions on interest rates, the March meeting could also bring about changes to another important instrument in the central bank’s tool kit: the balance sheet.
At the last meeting in January, policymakers and their staff discussed the possibility of either slowing or pausing the reduction of the Fed’s roughly $6.8 trillion portfolio of government-backed securities. The reason is to avoid amplifying market gyrations tied to an ongoing standoff over the debt ceiling, which caps how much money the government can borrow to meet its financial obligations.
The Treasury Department is using what it calls “extraordinary measures” to stay below the debt limit and ensure that the United States does not default on its debt. Eventually those measures will be exhausted, meaning Congress will have to raise the debt ceiling.
The Fed has been shrinking its holdings of Treasury and mortgage-backed securities since the middle of 2022, after its balance sheet reached almost $9 trillion as a result of its aggressive efforts to shore up financial markets at the onset of the pandemic. Last May, the central bank slowed its pace of allowing maturing securities to roll off and has maintained that ever since.
What the Fed is trying to avoid is a situation in which the amount of cash flowing in the banking system falls too low and causes short-term disruptions in funding markets, as was the case in September 2019.
