WASHINGTON — On Wednesday, the Federal Reserve decided to maintain its benchmark interest rate, following three consecutive rate cuts last year. This cautious move reflects the Fed’s ongoing efforts to assess future inflation trends and the possible economic policies that may arise under President Trump.
In their statement, the Fed acknowledged that the job market remains “solid,” pointing out that the unemployment rate has recently stabilized at a low level. The Fed also expressed a heightened concern regarding inflation, stressing that it is “somewhat elevated.” Generally, a robust job market coupled with persistent inflation indicates that further cuts to the Fed’s rates may be less likely in the coming months.
During a press conference, Fed Chair Jerome Powell sidestepped questions regarding President Trump’s recent remarks, one of which included a pledge to lower oil prices and subsequently “demand” lower interest rates. The president also mentioned wanting to discuss this issue with Powell directly.
Responding to inquiries about the president’s comments, Powell stated, “I’m not going to have any response or comment on whatever the president said.” When asked about any direct communication from Trump regarding lower rates, Powell replied that there had been “no contact.”
In discussing the Fed’s stance on interest rates, Powell emphasized a cautious approach, highlighting that while the economy appears robust—with an unemployment rate at 4.1% and growth exceeding 3% annually—there is no urgency to change the current policy.
When questioned about the potential effects of Trump’s proposed policy changes (including those related to tariffs, immigration, tax cuts, and deregulation), Powell stated that Fed policymakers are in a “wait and see” mode, looking to understand which policies will be implemented before making any evaluations. “We don’t know what will happen,” he noted, emphasizing the need to fully articulate these policies first.
Kathy Bostjancic, the chief economist at Nationwide Financial, opined that Powell’s remarks suggest that the Fed is unlikely to cut interest rates again until mid-year. “We are all in wait and see mode, including the Fed,” she mentioned.
In the past year, the Fed reduced rates from 5.3% to 4.3%, primarily out of concern for a weakening job market, particularly when hiring slowed down last summer and the unemployment rose slightly. However, recent data indicated a rebound in hiring, with the unemployment rate dropping to 4.1%.
Powell noted that assessing the trajectory of inflation is becoming increasingly complex, especially with the uncertainties surrounding the exact nature of Trump’s policies and their impact on the economy. While higher tariffs and potential tax cuts could increase inflation, deregulation might have the opposite effect.
Typically, the Federal Reserve maintains higher interest rates to reduce borrowing and spending, thereby cooling inflation. In December, Fed officials indicated they might only lower rates twice more this year, and Goldman Sachs economists predict these reductions will not occur until June and December.
As of November, inflation was reported at 2.4%, which is close to the Fed’s 2% target. However, core prices, excluding volatile food and energy costs, rose by a sharper 2.8% compared to the previous year, prompting the Fed to closely examine these numbers as they serve as a key indicator for future inflation trends.
Powell emphasized the Fed’s desire for “real progress on inflation or … some weakness in the labor market before we consider” any further interest rate reductions. In a later social media post, President Trump criticized the Fed for its handling of inflation and suggested his own strategies, which include boosting American energy production and slashing regulations.
During the news conference, Powell was also questioned about Trump’s executive orders aimed at reducing diversity, equity, and inclusion programs, which Powell has previously supported. He stated, “As has been our practice over many administrations, we are working to align our policies with the executive orders as appropriate and consistent with applicable law.”
Furthermore, Powell addressed the Fed’s recent decision to exit the Network for Greening the Financial System, an international group looking into how financial institutions can tackle climate change. The Fed had joined this group in 2020 but determined that its broader aims exceeded its current mandate.
While many central banks across developed nations are in the process of cutting interest rates, the Bank of Japan is moving in the opposite direction, raising its rates for the first time in years, as it experiences inflation after an extended period of stagnation.
Although a rate cut in March remains a possibility, the odds are currently deemed low, with financial markets pricing it at under 20%. Consequently, American consumers and businesses likely won’t witness significant relief from elevated borrowing costs in the near future. Recently, the average rate for a 30-year mortgage dipped to just under 7% after climbing for five weeks straight, but overall borrowing costs remain high throughout the economy.
Investors anticipate strong economic growth and persistent inflation, which may delay future rate cuts. This has caused the 10-year Treasury yield to rise above 4.80%, marking its peak for the year. Powell acknowledged that the current high-interest rates have made home-buying more difficult for many potential buyers, a trend that is likely to continue.
The stock and bond markets reacted mildly to the Fed’s announcement, as this decision was largely expected.
