Quick Overview

  • The Federal Reserve held its benchmark interest rate steady on Wednesday, as concerns grew among policymakers that the Trump administration's tariffs, deregulation, mass deportation, and tax cut plans could push inflation higher in the coming months.
  • Against a backdrop of solid economic growth and inflation still above the 2% target, policymakers unanimously decided to keep the federal funds rate target range unchanged at 4.25% to 4.5%. This pause in rate cuts was made by theFederal Open Market Committeeafter it had cut rates three times in a row last year, lowering the benchmark rate by a cumulative 100 basis points.
  • "The economy is strong, and the labor market is solid," Powell said at a press conference. "We believe the disinflation process is still ongoing, but the path is slow and sometimes bumpy." He added, "The overall sense of the committee is that we don't need to be in a hurry to adjust our policy stance."

Deep Insights

In recent weeks, Fed officials have repeatedly warned of the risk of resurgent price pressures and emphasized that, given the broad scope of the Trump administration's policy changes, they will adjust monetary policy based on a careful reading of the latest data.

"We don't know how tariffs, immigration, fiscal policy, and regulatory policy will evolve," Powell said. "We need to wait until these policies become clear before we can begin to make a reasonable assessment of their economic impact."

Powell repeatedly noted that Fed officials believe the current monetary policy stance is well-calibrated and requires no adjustment.

"Compared with before we started cutting rates in September last year, the current policy is significantly less restrictive," he said. "Therefore, before considering adjusting policy, we will focus on whether inflation shows substantial progress or whether the labor market shows signs of weakness."

Recent economic growth and employment data have not given policymakers a reason to lower borrowing costs.

The Atlanta Fed said Wednesday that U.S. gross domestic product (GDP) in the fourth quarter likely grew at an annualized rate of 2.3%. EY forecasts show GDP growth of 2.8% for all of 2024 and an expected 2.2% in 2025.

U.S. employers added far more jobs than expected last month. Labor Department data showed the economyadded 256,000 jobs, and the unemployment rate fell from 4.2% to 4.1%,with the three-month average job growthat 170,000.

Meanwhile, inflation has gradually eased over the past few months. According to data from the Bureau of Labor Statistics, excluding volatile food and energy prices,the core Consumer Price Index (CPI) rose 0.2% month over month in December, down from 0.3% in the previous month.

Consumer expectations that inflation will accelerate have recently flashed warning signals, as such sentiment can become self-fulfilling.

The Conference Board said Tuesday thatconsumers' inflation expectations for the next 12 monthsrose 0.2 percentage points this month to 5.3%, "possibly reflecting that inflation has been stickier in recent months."

The report echoes findings from the University of Michigan, which recently said inflation expectations in January rose to their highest level since last May.

According toJoanne Hsu, director of the University of Michigan's Surveys of Consumers, consumers' expectations for inflation over the next year jumped from 2.8% in December to 3.3% this month, exceeding the 2.3% to 3.0% range seen in the two years before the pandemic.

"Throughout the interviews, consumers' concerns about the future path of inflation were evident and were linked to views on anticipated policies such as tariffs," Hsu said in a statement. "Consumers continued to spontaneously express motives to make purchases in advance to avoid future price increases, and strong auto and retail sales data suggest consumers are indeed acting on these thoughts."

Powell downplayed the rise in short-term inflation expectations, saying consumers' views on long-term price trends remain stable, and the latter are more important to policymakers.

"Short-term expectations have ticked up a bit, but long-term expectations have not changed, and long-term expectations are what really matter," Powell said. He added that President Trump's policy proposals may have pushed up short-term expectations.

Trump has repeatedly said in recent months that he plans to comment on monetary policy, breaking the non-interference precedent upheld by President Joe Biden and several of his predecessors.

Trump said Thursday that once he achieves the goal of lowering oil prices and thereby slowing inflation, he will "demand that interest rates drop immediately."

In a televised address at theWorld Economic Forumin Davos, Switzerland, Trump said, "Likewise, interest rates should be lowered all over the world. Interest rates should follow us."

Powell declined to comment on Trump's remarks and said he has not been in contact with the president recently.

"I will not make any response or comment on the president's remarks; it would not be appropriate to do so," Powell said.

In their dot-plot projections released last month, Fed officials signaled they expect two 25-basis-point rate cuts in 2025. They projected thefederal funds rate to be loweredto 3.9% by the end of 2025 and to 2.9% by the end of 2026.

Since then, central bank officials have expressed concerns about price pressures and have been cautious about the magnitude of rate cuts this year.

"Regarding the potential policy changes from the new administration, recent Fed communications confirm that most Fed policymakers see increased upside risks to inflation from deregulation, immigration restrictions, tariffs, and tax cuts," Gregory Daco, chief economist at EY, said in an email.

Editor's note: This report has been updated based on Powell's remarks at the press conference.