Fed Holds Rates Flat As Tariffs, Uncertainty Make Their Mark

Federal Reserve officials held the central bank’s benchmark interest rate flat Wednesday, indicating that they plan to wait for President Donald Trump's early trade moves to percolate through the economy before they act.  

The target range for the federal funds rate will stay between 4.25% and 4.5%, the same outcome as The Fed's January meeting. The move by the Federal Open Market Committee was anticipated by investors, who are increasingly looking to make deals despite a cloudy economic outlook.

“There’s really high uncertainty,” Fed Chair Jerome Powell said during a press conference Wednesday. “We think our policy is in a good place and that we can move when we need to. But right now we think it’s appropriate to wait and, given where the economy is right now, we think the price of doing that is very low.” 

Fed officials said uncertainty around the economic outlook had increased in its commentary released with today’s decision, and FOMC members also released a new economic forecast that reflected a gloomier outlook than their December outlook.

The majority of board members see unemployment facing upward pressure, a significant shift from the seven of 19 members who saw trouble in the job market in December. Board members also have a worsening view on how high inflation will be this year, with the FOMC median prediction for core personal consumption expenditures rising 30 basis points since December to 2.5%. 

Board members’ projections on the target federal funds rate in 2025 remained mostly unchanged, with the consensus indicating that the Fed will cut rates by a maximum of 50 basis points this year.

“The hard data are still in reasonably good shape. It's the soft data, it's the surveys, that are showing significant concerns, downside risks and those kinds of things,” Powell said. “We don't dismiss that, we're watching carefully, but we don't want to get ahead of that.”

The FOMC also announced that, starting in April, it will slow the pace that it has been selling securities by reducing the redemption cap from $25B to $5B. The FOMC’s $35B cap for agency debt will stay in place.

The shift in securities policy prompted the lone no vote among committee members from Christopher Waller, who would have preferred to keep the current redemption cap in place.

The decision to keep rates flat follows three meetings in 2024 in which the Fed cut its benchmark rate by a combined 100 basis points. Today’s decision is unlikely to change the investment calculus for commercial real estate investors, but the capital markets space has already begun a thaw that is likely to continue, said Holly MacDonald-Korth, CEO of middle-market lender KDM Financial. 

“People have been more willing to enter the market,” she said. “We're seeing a lot more bridge activity in properties that we think are almost ready to go to stabilized funds.” 

“Extend-and-pretend is fading,” she added. “People who got one extension are probably not going to get a second extension, even though the environment is more favorable for borrowers and lenders are more active now.”   

Trump’s unconventional economic proposals have loomed over the Fed since the November election, and Powell reiterated Wednesday that the Fed would respond to current market conditions and not make decisions driven by projections. 

“I'm confident that we're well positioned, in the sense that we're well positioned to move in the direction we'll need to move,” Powell said. “I don't know anyone who has a lot of confidence in their forecast.”

Powell told reporters that tariffs had begun to show up in inflation data, but he suggested that price increases could be transitory and said longer-term inflation expectations remained well anchored.

Core inflation came in at 2.6% year-over-year for January, down from 2.9% in December but still well above the Fed’s 2% target. Trump’s tariff regime threatens to drive up prices, especially for the raw materials for manufacturing and construction that saw massive pandemic-era price hikes. 

Consumer confidence has plummeted and unemployment ticked up to 4.1% in February, a statistic that fails to capture many of the 200,000 federal employees who have recently been fired. 

The Fed is tasked with threading the needle of maximum employment and stable prices in a year where eggs are expected to get 41% more expensive largely due to an avian flu epidemic, and the federal government, which employed some 3 million people in November, is leading mass layoffs.

“I'm worried about unemployment. The jobs numbers are important to see how the DOGE cuts and things like that wash through the system, how it actually affects businesses and people's jobs,” MacDonald-Korth said. “The consumer is the engine of our economy. If we cut consumers’ income, what's going to happen and where?”

Treasury Secretary Scott Bessent told Bloomberg last month that he was more focused on the yield for 10-year U.S. Treasury bonds, which are used to price long-term debt like loans for commercial real estate, than the Fed’s target rate.

The 10-year Treasury yield has been sliding since Trump took office, mainly because the president has injected profound uncertainty into the investment market with whipsawing tariffs and a plan to cut taxes and gut federal bureaucracy. But the climb down follows a rally that began when the Fed made its first rate cut, and most investors expect that rates aren’t returning to prepandemic levels. 

The abrupt shift in economic policy has increased the likelihood of a recession, but it has also made real estate a more attractive asset class because of its defensive investment attributes. The major brokerage firms are projecting strong growth in 2025, in part because executives expect sales volume to pick up across most asset classes throughout the year. 

“People are getting more comfortable with values. For a couple years, we didn't have a lot of transactions because we weren't sure what valuations were and people were hesitant to come into the market,” MacDonald-Korth said. “That is changing.”

UPDATE, MARCH 19, 4:06 P.M. ET: This story has been updated with comments and information from Federal Reserve Chair Jerome Powell's press conference.