WASHINGTON — The Federal Reserve is widely expected to maintain its current key interest rate during this week’s policy meeting, occurring shortly after President Donald Trump announced plans to advocate for lower interest rates soon.
Fed officials, under the leadership of Chair Jerome Powell, have previously implemented consecutive rate cuts over the past three meetings, lowering the rate from a peak of 5.3%—the highest in two decades—to approximately 4.3%. However, recent economic indicators point towards robust job growth and marginal improvements in inflation, leading policymakers to suggest a deceleration in the rate cuts this year. Some members of the committee believe that few, if any, further cuts may be necessary.
The two-day meeting concluding on Wednesday might not yield significant changes, yet it marks the beginning of what is anticipated to be a challenging year for the Fed. Trump has recently emphasized his expected involvement in interest-rate discussions, claiming, “I know interest rates much better than they do.”
Fed officials are grappling with a crucial economic juncture: their goal is to maintain borrowing rates sufficient to drive inflation back to their target of 2%, while avoiding excessively high rates that could risk triggering a recession.
During his previous presidency, Trump had indicated that he might remove Powell, who was appointed in late 2017, but he has since refrained from making such threats. Powell’s tenure as chair lasts until May 2026, at which point Trump could appoint a successor.
Despite the upcoming opportunities for influence, Trump’s recent comments suggest that he will likely continue to publicly critique the Fed and its policies, diverging from the historical trend where past presidents adopted a more detached approach towards the central bank. Former President Joe Biden opted to reappoint Powell, signaling an intention to uphold the independence of the central bank from political pressures.
Vincent Reinhart, the chief economist at BNY Investments and a former high-ranking Fed economist, believes that Powell will remain unfazed by Trump’s criticisms regarding policy decisions.
“If you value your independence, you have to navigate criticism,” Reinhart stated. He added, “If it’s merely rhetoric, it does not pose significant concern for the Fed. I think Chair Powell recognizes the rules of engagement.”
Meanwhile, Fed officials have indicated a preference to bypass a rate hike, at least for January, in order to assess the labor market and broader economy.
“In January, we need to observe upcoming developments,” Fed governor Christopher Waller mentioned in a CNBC interview earlier this month. He noted that while further progress on inflation is necessary, the figures are nearing their goal.
According to the Fed’s favored measure, annual inflation stood at 2.4% in November, only slightly above the target, but has remained stagnant for approximately six months. However, there are emerging signs that inflation may ease later in the year due to increased apartment construction reducing rental costs and a deceleration in car insurance prices.
Some officials, like Beth Hammack, president of the Fed’s Cleveland branch, argue that the continued presence of inflation warrants maintaining higher key rates. Hammack opposed the recent quarter-point reduction in rates last month.
Job growth surged in December, correcting a downturn from earlier in the fall that had raised concerns at the Fed. Policymakers had previously agreed on a half-point rate cut in September, partly due to fears about a diminishing job market potentially leading to a recession. However, the unemployment rate saw a decrease to a notable 4.1% in December. A significant slowdown in hiring would likely prompt the Fed to pursue rate cuts more aggressively.
The committee of 19 members making interest rate decisions showed that expectations for rate reductions this year are modest, with signals indicating a potential reduction of just twice. Nevertheless, opinions within the committee are divided. Some, like Waller and Austan Goolsbee, president of the Chicago branch, advocate for lower rates, citing ongoing cooling inflation trends, while others, like Hammack and Jeffrey Schmid from the Kansas City branch, assert that ongoing inflation, paired with a stable economy, does not necessitate significant cuts in borrowing costs at this moment.
A significant uncertainty for the Fed in the coming year lies in the future of potential tariffs to be enforced by Trump, and their possible effects on price levels. Additionally, the mass deportation of immigrants could lead to increased labor costs as employers compete to fill vacant positions, a factor that may also contribute to inflationary pressures.
Most economists predict that widespread tariffs will likely contribute a slight uptick in inflation, estimated at several tenths of a percentage point. While this increase is not substantial, it could influence the Fed to delay any rate cuts. The implementation of tariffs and subsequent evaluation of their economic impact may take months, with some analysts suggesting the effects may not be clearly defined until the next year.
Kevin Warsh, a former Fed governor seen as a potential contender to replace Powell, recently argued that Trump’s promises to lower regulatory barriers could potentially reduce business costs, resulting in lower inflation.
Federal Reserve likely to maintain current interest rates despite Trump’s calls for reductions
