Federal Reserve signals willingness to keep cutting rates even as inflation outlook worsens

The Federal Reserve held its policy rate unchanged at a range of 4.25% to 4.5% at its March meeting.

The so-called “dot plot” shows that the median Fed official thinks 50 basis points of rate cuts will be appropriate this year, followed by another 50 basis points next year, unchanged from their December projections.

Amid cutting their 2025 GDP forecast to 1.7% from 2.1%, the central bank also raised its forecast for core PCE inflation to 2.8% from 2.5%.

Importantly, the prospect of less progress in getting inflation down to their 2% target isn’t derailing plans to cut rates going forward.

Stocks gained in the wake of the decision, while two-year yields fell. The sectors home to the Magnificent 7 stocks have done the best since 2:00 p.m. ET.

Neil Dutta, head of US economics at Renaissance Macro Research, attributes the decent reaction to the market having an inflation forecast that’s a little more optimistic than the central bank.

“The Fed sees tariffs as bad for growth, unemployment and inflation,” he wrote. “Yet, despite the 0.3ppt upward revision in the core inflation forecast, the median dot was unchanged, still showing two cuts. If core inflation comes in softer than that bogey, there is room to pull cuts from 2026 into 2025.”

“Uncertainty around the economic outlook has increased,” according to the policy statement.

The combination of President Donald Trump’s victory in the November election and firmer-than-expected inflation readings near the tail end of last year have prompted monetary policymakers to become more concerned about the outlook for price pressures.

The central bank also said it will begin to slow balance sheet shrinkage at the beginning of next month.