WASHINGTON – The Federal Reserve paused its interest rate cutting campaign Wednesday and gave no signal it plans to lower rates again in the near term amid uncertainty spawned by inflation and President Donald Trump’s economic policies.
The decision to hold rates steady at a range of 4.25% to 4.5% could mark the beginning of an extended respite as the Fed assesses the course of inflation and awaits details on Trump’s trade and immigration plans. Alternatively, it could be a brief hiatus if inflation swiftly resumes a pullback and officials believe the President’s policies will modestly nudge up consumer prices.
“In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the (Fed) will carefully assess incoming data, the evolving outlook, and the balance of risks,” the Fed said in a statement following a two-day meeting.
That mirrors the guidance Fed officials provided in December and signals “some patience” as they weigh further reductions in the key rate while navigating myriad economic and policy crosscurrents, according to Barclays.
Inflation broadly has eased since a pandemic-related surge but stayed elevated in recent months. The economy and job market have been remarkably resilient, though hiring has slowed substantially. And it’s unclear to what extent Trump will slap certain imports with tariffs and deport millions of immigrants who lack permanent legal status, and what the effects will be on the economy and inflation.
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In its statement, the Fed removed its assertion in December that inflation “has made progress” toward the Fed’s 2% goal, simply noting that “inflation remains somewhat elevated.”
It also gave a nod to a job market that has picked up steam lately – with unemployment edging down to a historically low 4.1% – and doesn’t seem to need a boost from Fed rate cuts.
“The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid,” the Fed said. That’s an upgrade from the previous statement that noted “labor market conditions have generally eased, and the unemployment rate has moved up but remains low.”
Noting that inflation is still above the Fed’s 2% goal while the economy and job market are strong, Fed Chair Jerome Powell told reporters Wednesday, We don’t need to be in a hurry to adjust” interest rates.
Trump accuses Fed, Powell of failing to stop inflation
After Wednesday’s Fed meeting, President Trump accused the Fed and Powell of creating and failing to stop pandemic-era inflation, which has fallen but has yet to return to the Fed’s 2% goal.
Trump, who appointed Powell as Fed chair in 2018, said he would lower inflation himself through various initiatives including energy production, American manufacturing and “slashing regulation.”
“The Fed has done a terrible job on Bank Regulation,” Trump said in a post on Truth Social. “Treasury is going to lead the effort to cut unnecessary Regulation, and will unleash lending for all American people and businesses.”
The president’s message also accused the Fed of being too focused on diversity, equity, and inclusion efforts and climate change.
Powell addresses Fed staffing levels
Tesla CEO and Department of Government Efficiency head Elon Musk last month accused the Fed of being “absurdly overstaffed.”
When asked for his thoughts, Powell said the Fed runs a “very careful budget process.”
“We owe that to the public, and we believe we do that,” he said.
Fed keeping an eye on Trump administration policy changes
Powell said the Fed would be carefully watching the Trump administration’s new stance on tariffs, immigration, fiscal policy and regulatory policy but would not rush its response.
“The (Fed) is very much in the mode of waiting to see what policies are enacted,” he said, adding there are many details about any tariffs that are unclear, including how they could affect consumer prices.
“It’s one thing to do that, to make assessments about what might happen and begin to think about what you might do in that case, but you don’t act until you see much more than we see now,” he added.
Stock market reaction
U.S. stocks fell after the Fed kept rates steady, as expected, but seemed to shift its view on inflation.
But while the Fed dropped its reference to inflation making “progress, Powell downplayed the change as a technical one and said recent inflation readings generally have been positive.
“The market is already jumping on the omission of inflation progress from the FOMC (Federal Open Market Committee) statement as a hawkish signal,” or wanting to fight inflation, said Seema Shah, chief global strategist at Principal Asset Management. Doves are less concerned with inflation.
The S&P 500 ended the day down 0.5% at 6,039.31; the Dow Jones Industrial Average dropped 0.31% to 44,713.52 and Nasdaq fell 0.5% to 19,632.32.
Fed ‘reviewing’ Trump’s anti-DEI orders
Powell at a 2021 conference said he believes the most successful organizations “are often the ones that have a strong and persistent commitment to diversity and inclusion.”
Wednesday, Powell said he still believes that to be true, but the Fed is reviewing Trump’s executive order to end diversity and inclusion efforts in the federal government.
“We are working to align our policies with the executive orders as appropriate and consistent with applicable law,” he said.
Powell addresses Trump’s plan to ‘demand’ interest rate drop
When asked about Trump’s comment last week that he would “demand interest rates drop immediately,” Powell declined to comment on whether the president has made that demand or whether his comments have influenced policy.
“The public should be confident that we will continue to do our work as we have, focusing on using our tools to achieve our goals, and really keeping our heads down and doing our work,” Powell said, adding that he hasn’t been in contact with Trump.
Powell later reiterated that the Fed would continue to operate independently.
“That’s always what we’re going to do. And people should have confidence in that,” he said.
What causes the Fed to change interest rates?
The Fed raises interest rates or keeps them higher for longer to lower inflation by discouraging borrowing and economic activity. It cuts rates to juice a flagging economy or bring rates back to normal as inflation moderates.
What is the current Fed interest rate?
Wednesday’s decision to hold the Fed’s benchmark short-term rate steady comes after officials reduced it by a total percentage point at three straight meetings late last year. That has lowered borrowing costs for credit cards, some mortgages and auto and other loans, and sparked a stock market rally. It also has pushed down bank savings yields that were finally generating healthy returns.
Is inflation really going down?
After raising the federal funds rate to a 23-year high to curb a pandemic-related price surge in 2022 and 2023, the Fed slashed it as its preferred annual inflation measure fell from 5.6% in early 2022 to 2.8% in November – still above its 2% goal.
But inflation has been stuck at that mark in recent months and economists predict a report Friday will reveal a similar figure. That has led Fed officials to predict fewer rate cuts and a pause at this week’s meeting even apart from Trump’s policies.
Monthly cost increases, however, have been tamer and that should translate to milder annual price rises the first half of 2025 due to favorable comparisons with year-ago figures, Goldman Sachs said in a research note. That could give the Fed some leeway to cut rates again within months.
What’s the state of the job market?
Meanwhile, the labor market heated up in December, with employers adding 256,000 jobs and the unemployment rate dipping. Hiring, however, has slipped below pre-pandemic levels and net job growth is robust chiefly because of low layoffs, possibly foreshadowing a slowdown.
The government this week is expected to report the economy grew close to a sturdy 3% annual rate in the fourth quarter and for all of 2024.
How many rate cuts are expected in 2025?
Economist Ryan Sweet of Oxford Economics said the Fed could still agree to as many as three quarter point rate cuts this year, starting as soon as March, if inflation resumes its descent and the job market slows.
Fed Governor Chris Waller recently told CNBC he wouldn’t rule out a March rate cut. “As long as data comes in good on inflation, then I can certainly see cuts coming sooner than markets are pricing,” he said. He has said he doesn’t think tariffs will have a big impact on inflation.
Both Fed officials’ median estimate and futures markets forecast two rate cuts this year. Markets reckon the first will come in June.
Yet some Fed officials have said the recent high inflation readings suggest they should be cautious, especially in light of a solid economy that doesn’t appear to need the Fed’s help. Toss in tariffs that are likely to be passed along to consumers through higher prices and an immigration crackdown that shrinks the labor supply and could raise wages. Both policies could reignite inflation by the second half of the year, Barclays says.
Deutsche Bank estimates 25% tariffs on Canada and Mexico would raise inflation nearly a percentage point to 3.7% by the end of the year. Additional duties on China could lift inflation further.
As a result, Barclays predicts just one rate cut this year in June while Deutsche Bank doesn’t foresee any. Even a pivot to rate hikes is possible, Barclays says, if Trump’s planned tax cuts rev up the economy while tariffs and deportations boost inflation expectations that drive inflation itself higher.
Others project small price bump from tariffs, saying say a drop in imports would strengthen the dollar, lowering import prices for Americans and at least partly offsetting the duties.
Under a worst-case scenario, tariffs and deportations could both goose inflation and reduce consumer spending and economic growth. That would present a thorny dilemma for the Fed – keep rates high to beat back inflation or lower them to jolt the economy.
The Fed’s decision is its first during the Trump administration and comes nearly a week after he told the World Economic Forum he’ll “demand that interest rates drop immediately” after OPEC takes steps to lower oil prices. Such a move presumably would help push down inflation.
The remark set up a clash with Fed Chair Jerome Powell and the central bank, which is structured as an independent agency insulated from political influence so it can make decisions based on the best interests of the economy. Trump repeatedly badgered Powell to cut rates during his first term, though it didn’t appear to affect Fed moves.
What’s next?The Fed will likely stand pat after flurry of rate cuts. After that? It’s anybody’s guess.
How will Trump’s economic plans affect interest rates?
President Donald Trump’s plans to cut taxes, impose hefty tariffs on imports and deport millions of immigrants who lack permanent legal status have generated an unusual level of uncertainty about the course of the economy, inflation and interest rates.
USA TODAY previously looked at various scenarios that could result from Trump’s economic policies.
In one predicted scenario, his policies could modestly stoke inflation while the economy slows but posts solid growth. That could move the Fed to order two, or possibly three, rate cuts this year.
Or, Trump’s initiatives could more emphatically reignite inflation while the economy grows sturdily or even heats up. That would probably mean fewer rate cuts from the Fed in 2025 — perhaps none. It might even put rate hikes back in play, forecasters say.
Another possibility: Trump’s blueprint could drive inflation higher while also weakening the economy, an unusual tandem that would pose a vexing dilemma for the Fed: Cut? Hike? Stand pat?
Time will tell.
Why would the Fed stop cutting interest rates?
The Fed chose to reduce its benchmark interest rate three times at consecutive meetings in late 2024.
Why stop now?
If the Fed pauses in its downward path on interest rates, the regulatory pause will have lot to do with inflation. Consumer prices have continued to rise in recent months, albeit at a slower pace than in most of 2022 or 2023. The Fed’s perfect-world inflation target is an annual rate of 2%. The current inflation rate, as of December, is 2.9%. The figure represents a five-month high.
Even as the Fed ordered the last of its 2024 rate cuts, at its December meeting, the panel forecast a significantly slower pace of cuts in 2025, citing lingering inflation and strong economic growth.
In that meeting, the Fed projected only two rate cuts in 2025, down from the four they had envisioned in September.
Will interest rates ever go down?
The Fed didn’t budge on interest rates, which means American consumers may have to wait a while to see borrowing costs go down on, well, pretty much everything.
“Anyone hoping for the Fed to ride in as the cavalry and rescue you from high interest rates anytime soon is going to be really disappointed,” said Matt Schulz, chief credit analyst at LendingTree, in an email. “That’s true whether you’re talking about mortgages, auto loans, credit cards or most anything else. That means it is maybe more important than ever to get that high-interest debt under control.”
The average annual interest rate on a new credit card is 24.26%, LendingTree reports. That would be a prime example of high-interest debt.
The average interest rate on a fixed-rate 30-year mortgage is 6.65%, according to Zillow. Bankrate puts the national average at 7.05%. Either way, mortgage rates are much higher now than three or four years ago, when they sat near historic lows.
Why does the Fed raise or lower interest rates?
“Part of the mission Congress has given to the Federal Reserve is to keep prices stable. This means not letting prices rise or fall too quickly,” the Federal Reserve Bank of Cleveland says on its website.
When inflation is running high, the Fed typically raises interest rates to slow the economy and bring inflation down. When inflation is too low, the Fed might lower interest rates to stimulate the economy and raise the inflation rate.
The central bank also lowers rates to stimulate a soft economy and job market, or just to give the economy some breathing room. That, economists say, is what the Fed has been doing over the past year.
Why did the Fed cut interest rates in 2024?
The Fed hiked interest rates to a 23-year high of 5.25% to 5.5% to fight a historic inflation surge. After holding rates at that level through parts of 2023 and 2024, the Fed began lowering its benchmark rate in September, signaling that inflation was coming under control. The annual inflation rate has eased from a peak of 9.1% in mid-2022 to 2.9% in December: much lower, but still above the Fed’s 2% inflationary goal.
A series of rate cuts brought the benchmark federal funds rate down a full percentage point between September and December 2024, to the current range of 4.25% to 4.5%.
The Federal Reserve has decided to keep interest rates unchanged in their latest meeting. This decision comes as no surprise to many analysts, as the Fed has been hesitant to make any major changes to monetary policy amidst ongoing economic uncertainty.
While some had speculated that the Fed may begin to raise rates in response to rising inflation and a strong labor market, the central bank has opted to maintain its current stance for the time being. This decision reflects the Fed’s cautious approach to managing the economy and ensuring a gradual and sustainable recovery.
The Fed’s decision to hold rates steady may come as a relief to borrowers, who will continue to benefit from low interest rates on loans and mortgages. However, savers may be disappointed as they will continue to earn minimal returns on their savings accounts.
Overall, the Fed’s decision to keep interest rates unchanged signals their commitment to supporting the economy and promoting long-term stability. As the economic outlook continues to evolve, the central bank will closely monitor key indicators and adjust its policies accordingly.
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