Federal Reserve officials didn’t alter interest rates this week, and investors shouldn’t get too comfortable with their projections for two rate cuts later this year. That is because the economic outlook remains highly uncertain, a point Fed Chair Jerome Powell made repeatedly at a press conference Wednesday following the March 18-19 Federal Open Market Committee Meeting.

FOMC members voted unanimously on Wednesday to hold the target range for the federal-funds rate at 4.25% to 4.5%, and once again penciled in a median forecast for two rate cuts in 2025, as they did in December. But significant changes, announced and expected, in federal policies on trade, immigration, and fiscal spending mean rate expectations could change later this year.

In other words, the Fed may cut twice, or more or less, or not at all.

“It’s really hard to know how this is going to work out,” Fed Chair Jerome Powell said Wednesday. “I don’t know anyone who has a lot of confidence in their forecast.” 

Committee members’ projections for the federal-funds rate are based on individuals’ expectations. Powell acknowledged at the press conference that putting together forecasts for the March meeting was an “admittedly challenging exercise at this time” in light of policy and economic uncertainty.

“While these individual forecasts are always subject to uncertainty, as I noted, uncertainty today is unusually elevated and of course these projections are not a committee plan or a decision,” Powell said, adding that “policy is not on a preset course.” 

Fed officials essentially project stagflation this year, with both lower growth and higher inflation. In the FOMC’s Summary of Economic Projections, officials revised down their initial forecast for real gross domestic product growth in 2025 to 1.7% from 2.1% in December’s SEP. Policymakers also projected an unemployment rate of 4.4%, up from an earlier median forecast of 4.3%.

Most notably, perhaps, their inflation projections were revised upward for 2025 and 2026. Officials now expect the benchmark Personal Consumption Expenditures (PCE) price index to end the year with a gain of 2.7%, up from the 2.5% headline reading expected in December. Moreover, they don’t expect inflation to reach the Fed’s annual target of 2% until 2027.

It may not take much to keep the Fed on the sidelines this year, foregoing any rate cuts, given the inflation outlook. Yet, while the labor market is stable for now, Powell noted that any meaningful increase in layoffs could translate quickly into higher unemployment. That could cause the Fed to cut rates repeatedly during the remainder of the year.

Underscoring the cloudy outlook, Powell cited some form of the word “uncertainty” 18 separate times in a roughly 60-minute briefing. Officials also noted in their official postmeeting statement that “uncertainty around the economic outlook has increased.” 

That is due, in part, to the expected impact of the Trump administration’s tariffs on imported goods. “The SEP doesn’t really show further downward progress of inflation, and that’s due to the tariffs coming in,” Powell said.

He noted that officials’ “base case” on price increases associated with tariffs is that they will be “transitory,” however.

“It can be the case that it’s appropriate sometimes to look through inflation if it’s going to go away quickly without action by us—if it’s transitory—and that can be the case in the case of tariff inflation,” he said. “That would depend on tariff inflation moving through fairly quickly and it could depend critically as well on inflation expectations being well-anchored.”

Even beyond the effect of tariffs, Powell said inflation could prove bumpy this year. He noted that goods inflation moved up significantly in the first two months of the year, ahead of any substantial impact from tariffs. 

Still, Powell reiterated that he is confident the central bank’s rate policy is well positioned to respond to changing dynamics in the economy. He said officials are focused on the so-called “hard data,” as opposed to softer sentiment and confidence indicators that have fallen sharply in recent months. 

“The hard data are still in good shape,” Powell said, pointing to indicators such as employment and consumer spending. “Its the soft data, the surveys, that are showing significant concerns, downside risks, and those kinds of things.”

Powell said that while officials aren’t dismissing declines in consumer confidence, the correlation between the survey data and economic activity hasn’t been tight in recent years. 

Powell also played down the sharp rise in longer-run inflation expectations in the University of Michigan consumer sentiment survey, calling it “an outlier.” He noted that inflation expectations measured by other surveys, including the New York Fed’s survey, are still well anchored.  

The Fed’s wait-and-see approach on economic activity and inflation means it could be several months until Fed officials gain the clarity they are seeking.

“The fact that FOMC members have revised down their projections for economic growth quite substantially but at the same time revised up their projections of core inflation is telling,” writes Brian Coulton, chief economist for Fitch Ratings. “It speaks to the adverse impact of the surge in U.S. import tariffs under way. In combination with the recent sharp jump in households’ five-year-ahead inflation expectations, this is making the Fed’s job a lot harder and means they will hold off on further rate cuts for quite a while.”

The Fed’s lack of action could accelerate the shocks from trade policy, writes Joe Brusuelas, chief economist at RSM. “Given the pervasive uncertainty around the size and magnitude of the trade shock, the Fed’s wait-and-see approach will prove challenging at best,” Brusuelas said. “The primary takeaway for businesses, policymakers, and investors from the Fed’s decision is risk aversion until the size of the shock can be ascertained and the new rules of the road for trade and finance are set.”