The Federal Reserve decided to keep interest rates unchanged on Wednesday, taking a cautious approach in light of a mixed economic outlook and concerns over how some of President Donald Trump’s policies could affect inflation. This pause follows a series of interest rate cuts made between September and December last year. While the Fed has not announced when the next cut will happen, officials suggest future reductions will be slower, down from the previously anticipated four cuts to just two this year.
Fed Chair Jerome Powell shared that the economy remains strong and has made significant progress over the last two years. He emphasized that the Fed can afford to move cautiously as it awaits further progress on inflation, which, while lower than it was three years ago, is still higher than the Fed’s target. Powell noted that inflation is on track to decrease slowly over the next couple of years.
In a statement after the two-day meeting, the Fed expressed overall confidence in the economy, despite inflation still being “somewhat elevated.” The statement highlighted that the unemployment rate has remained low, and labor market conditions are solid.
This week’s decision to hold interest rates steady is partly due to uncertainty about how Trump’s policies, including potential global trade changes and tariffs, will impact the economy. Although the exact effects are unclear, some Fed officials have started factoring these developments into their projections.
After the announcement, the financial markets saw a slight dip. President Trump criticized the Fed’s decision, accusing them of not doing enough to address inflation. However, he stopped short of demanding lower interest rates.
Powell stated that the Fed is currently in a “wait-and-see” mode regarding new policies. He explained that the Fed cannot yet fully assess the potential economic impact of changes in trade, immigration, fiscal, and regulatory policies, as many of these policies are still in early stages.
The Fed’s key short-term interest rate remains between 4.25% and 4.5%. Despite last year’s rate cuts, long-term borrowing costs, including government bonds and mortgage rates, have risen, partly due to expectations of a stronger economy ahead.
Powell also discussed how much lower interest rates could go to reach a neutral level—one that doesn’t either stimulate or restrict economic growth. He pointed out that current rates are still high enough to impact economic growth, but they have contributed to controlling inflation and bringing balance to the labor market.
After raising rates sharply in 2022 to combat high inflation, the Fed began lowering rates in September to support a weakening labor market. Now, concerns about the job market have lessened, with unemployment remaining low. However, inflation remains stubbornly high, hovering above the Fed’s 2% target, though it shows signs of cooling. For instance, inflation, excluding volatile food and energy prices, eased in December, and housing price increases are slowing down.
Given the potential for new tariffs and changes in immigration policy under the Trump administration, which could drive up prices, the Fed has signaled it will continue to monitor these developments closely. Joe Brusuelas, Chief Economist at RSM US, noted that the Fed is on the right path but will need to better understand the potential effects of these policies before making further rate decisions.
Last week, Trump suggested that his administration’s efforts to lower energy prices could help keep inflation under control and reduce interest rates. He specifically pointed to oil prices, suggesting that a drop in energy costs would naturally bring inflation down, which would in turn allow the Fed to lower interest rates.
Although the Fed operates independently from the White House, Powell affirmed that the central bank aligns its policies with executive orders from the current administration, including recent orders related to diversity initiatives.
The Federal Reserve has paused interest rate cuts for now, it remains cautious, carefully watching both domestic and global economic developments, particularly those tied to the Trump administration’s policies.