The US Federal Reserve kept interest rates at their current level for the second consecutive meeting on Thursday ( Hong Kong time ) as it sees slower growth and higher inflation ahead.

The Fed also downgraded its outlook for economic growth and hiked its inflation projection. The economy is now projected to accelerate at 1.7% this year, 0.4 percentage point slower than its last projection in December 2024, while inflation is forecast to grow at a pace of 2.8% annually, 0.3 percentage point higher from its previous estimate.

The Fed is also scaling back its quantitative tightening programme where it is reducing the volume of bonds on its balance sheet. It will now allow just US$5 billion of US treasuries that it holds to roll each month, down from its previous level of US$25 billion.

The bellwether federal funds rate remains at its current range of 4.25% to 4.50%, at least until the next meeting of the Federal Open Market Committee’s ( FOMC ), the Fed’s policymaking body, in May and possibly beyond, unless there is a substantial change in the economic data, particularly the inflation rate, employment rates, and sales data.

The FOMC meeting began its two-day policy meeting on Wednesday with soft but not collapsing employment data and a persistently high inflation rate level, the key data points the Fed monitors.

As of February, there were signs of a cooling labour market with the unemployment rate increasing slightly to 4.1%, with 7.1 million individuals unemployed, while employers added 151,000 jobs, falling short of the anticipated 160,000 to 170,000 range, data from the US Bureau of Labor Statistics show.

US inflation slipped marginally to 2.8% in February from 3.0% in January, still way above the Fed target of 2.0%.

Market volatility also remains high with the Cboe Volatility Index ( VIX ), commonly referred to as Wall Street's “fear gauge”, standing at 21.70 as of March 18, reflecting a 5.80% increase from the previous close. Historically, VIX levels above 20 suggest increased market volatility and uncertainty.

Atlanta Fed warning

Economists expect the Fed to cut the rates two to three times this year as a response to the economic slowdown and limited progress towards the 2% inflation target.

Market sentiment on the US economic outlook in 2025 has shifted since the turn of the year given the trade and fiscal policy uncertainty from the new Trump administration, according to Michael Krautzberger, global chief investment officer, fixed income, at AllianzGI.

“At the start of this year, barely one Fed rate cut in 2025 was priced into short-term interest rate markets in recent weeks; pricing has moved towards three rate cuts,” Krautzberger says.

“We think that the best way to play the current macro and policy environment in the US is via curve steepeners. However, given recent market volatility, we prefer to trade tactically around structural positions, such as in our curve steepener views.”

He suggests that the best investment strategy is to position for a steeper yield curve with the expectation that long-term rates will rise more than short-term rates.