The Federal Reserve’s Federal Open Market Committee (FOMC) held interest rates steady and maintained its target federal funds rate range at 4.25-4.5%, as was widely anticipated before Fed Chair Jerome Powell’s announcement on Wednesday, March 19, 2025.
The economy has some mixed signs. The projection for GDP growth in 2025 is 1.7%, which is down 0.4 percentage point from the last projection in December 2024. Meanwhile, inflation is expected to remain at 2.7% this year and fall 2.2% next year. A big question is whether the prospective drop in inflation will happen is the economy’s reaction to Trump’s tariffs, which typically cause higher prices initially. Further, there are other factors that are causing uncertainty in markets, including the debt ceiling, and fiscal policy. Markets initially reacted favorably to Wednesday’s news from the Fed.
The FOMC reports that recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated, but it is down significantly from 2022, when the annual inflation rate was 8%.
So while the Fed continues to pursue its dual goals of maximum employment and inflation at the rate of 2% over the longer run, uncertainty about the economy has increased. The FOMC will adjust monetary policy if risks emerge that could impede the attainment of its goals. The assessments consider a wide range of data, including labor market conditions, inflation pressures and expectations, financial markets, and international developments.
Potential Dangers That Could Impact Interest Rates
Chair Powell said during his press conference that there has been “moderation in consumer spending” and that The Fed anticipates that tariffs could put more upward pressure on prices. The University of Michigan Survey of Consumers figure for March was 57.9, a 10.5% decline from February and the lowest it has been since November 2022. Among the causes is growing fears about higher prices as President Trump plans to hike more tariffs against U.S. trading partners. Further, the frequent “on again, off again” tariff announcements are rattling consumers and business owners alike.
Related: Tariffs: 4 Things Small Businesses Can Do Now To Survive
The Michigan study focuses on three areas: how consumers view prospects for their own financial situation, how they view prospects for the general economy over the near term, and their view of prospects for the economy over the long term.
Powell said the Fed will monitor White House policy changes before making monetary policy decisions.
“It’s the net effect of these policy changes that will matter for the economy and for the path of monetary policy,” he said. “Uncertainty around the changes and their effects on the economic outlook is high.”
Positive Signs Could Mean Lower Interest Rates
“Despite elevated levels of uncertainty, the U.S. economy continues to be in a good place,” Powell said recently at the annual U.S. Monetary Policy Forum in New York.
The recent Labor Department Jobs Report on Friday, March 7, reported that the unemployment rate remains at a near historic low of 4.1%. Employment trended upwards in health care, financial services, transportation and warehousing, and social assistance. Federal government employment declined by 10,000 in February, which is not surprising after DOGE announcements of firings in recent weeks.
A positive sign is that the federal funds rate remains a full percentage point lower than its post-COVID peak of 5.375% during the period from July 27, 2023, to Sept. 18, 2024. Additionally, officials expect to implement another half percentage point in rate cuts this year. Since The Fed usually adjusts rates in quarter percentage points, the likelihood – if trends continue in a positive note – is that there would be two more reductions in 2025.
There are three takeaways from the Federal Reserve’s decision to hold interest rates steady.
- Economic uncertainty makes it difficult for small business owners to plan for the future. Small business owners may hesitate to invest in growth (expansion or acquisition), hire new employees, or make large purchases.
- With the current interest rate h, existing variable rate business loans remain at their current levels. Business owners who had hoped to get a reduction in their interest rates from the Federal Reserve yesterday were disappointed because payments will not go down. Thus, their cost of capital remains heightened, and they likely won’t come down again until May 7, the date of the next FOMC meeting. The problem is that non-action by the Fed could impact cash flow, especially for businesses with tight margins, such as restaurants, as well as businesses that are looking to expand.
- The possibility of future interest rate cuts by the central bank offers hope for companies that are looking to borrow money at lower interest rates later this year. However, it is important to note that Chair Powell made no guarantees, just projections. Business owners should avoid making significant decisions based solely on projections.
Cash flow is the life blood of any business. Manage it well. Manage your costs, including labor, inventory, and cost of capital.
Related: 7 Ways Businesses Can Cut Costs Without Sacrificing Quality
This is particularly important as the most recent Biz2Credit Small Business Earnings Report found that average revenues and expenses rose in February. The good news was that average earnings of small businesses increased last month as revenue growth outpaced the rise in costs.
There is no doubt that the start of Donald Trump’s second term has been chaotic, and the tariff wars we have seen since he took office has caused uncertainty in the economy. However, the Consumer Price Index (CPI), which rose 2.8% in February compared to 12 months earlier, decelerated from January.
The wholesale price of eggs – an item that consumers and economists have pointed to as a sign of inflation – has dropped considerably, according to recent data from the Department of Agriculture. The national average price of eggs has dropped from $8.58 a dozen at the end of February to $4.83 a dozen now – a 40% decline.
Importantly, the price of gasoline is declining. According to AAA, the national average for a gallon of gas has dropped to $3.11, primarily due to lower oil prices. More than two-thirds of gas stations across the country have gas prices under $3 a gallon, according to GasBuddy. The cost of a barrel of oil has dipped to under $67, and President Trump expects his energy policies could drive fuel prices even lower, which benefits all types of business in the economy, including goods that are transported across the country, logistics companies, airlines, hotels, and tourism.
The Fed is going to wait and see how the totality of Trump’s policies impact the economy before adjusting interest rates. Lower fuel prices will lower costs for many things, while tariffs could jack them up. The president insists that tariffs will help expand American manufacturing, which would make for a stronger economy overall.
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