WASHINGTON – On Wednesday, the Federal Reserve decided to pause its campaign of lowering interest rates, indicating no immediate plans for further cuts. This decision comes in response to the ongoing challenges posed by inflation and the economic impacts of President Donald Trump’s policy changes.

The Fed’s choice to maintain the interest rates between 4.25% and 4.5% suggests a potential period of stability as officials monitor inflation trends and await specifics on Trump’s trade and immigration strategies. This could either represent a lengthy break if inflation decreases consistently, or a temporary pause if inflation begins to rise again due to presidential policies.

“In considering possible future adjustments to the federal funds rate, the Fed will closely review incoming data, the shifting outlook, and various risks,” the Federal Reserve stated after a two-day meeting.

This mirrors guidance from December, indicating a preference for “patience” while assessing any further reductions in this key rate, particularly in a complex economic environment, according to Barclays.

Inflation has generally eased since its sharp increase linked to the pandemic but has shown signs of remaining high in recent months. The economy and job market have displayed surprising strength, despite noticeable slowdowns in hiring. The impact of potential tariffs and mass deportations of undocumented immigrants by Trump on the economy and inflation remains uncertain.

In its latest statement, the Fed dropped its earlier claim that inflation had made progress toward its target of 2%, now stating that “inflation remains somewhat elevated.”

Additionally, the Fed acknowledged improvements in the job market, noting unemployment has recently decreased to a low 4.1%, suggesting no urgent need for rate cuts.

“The unemployment rate has stabilized at a low level in recent months, with solid labor market conditions,” the Fed remarked, which is a positive shift from previous statements that indicated a slight easing in labor market conditions.

Recognizing that inflation is still above the Fed’s 2% target while the economy and job market are robust, Fed Chair Jerome Powell told reporters, “We don’t need to rush to alter” interest rates.

Trump Blames Fed for Inflation Problems

Following the Fed meeting, President Trump criticized the Fed and Powell for their inability to control inflation, which while down from its peak, remains above the central bank’s target.

Trump, who nominated Powell as Fed chair in 2018, expressed his intent to reduce inflation through measures in energy production, U.S. manufacturing, and regulatory rollbacks.

“The Fed hasn’t done a good job regarding Bank Regulation,” Trump stated on Truth Social. “The Treasury will lead efforts to cut unnecessary regulations, facilitating increased lending for Americans and businesses.”

Furthermore, the President’s criticisms included claims that the Fed has been overly preoccupied with diversity, equity, and inclusion, as well as climate change issues.

Fed Monitors Trump’s Economic Strategies

Powell mentioned that the Fed will closely observe the Trump administration’s policies related to tariffs, immigration, fiscal approaches, and regulatory measures, without hastening its reaction.

“The Fed is in a ‘wait and see’ mode regarding enacted policies,” he explained, noting the ambiguity surrounding potential tariffs and their impact on consumer prices.

“It’s one thing to speculate on potential outcomes and prepare for possibilities, but action will only be taken once more clarity is reached,” he added.

Market Response to Fed Decision

U.S. stock markets dipped after the Fed’s decision to maintain steady rates was announced, particularly in light of the Fed’s changed perspective on inflation.

Despite the Fed’s removal of language suggesting inflation had made “progress,” Powell minimized this adjustment, stating that recent inflation indicators have been generally favorable.

“The market seems to interpret the omission of inflation progress from the FOMC statement as a hawkish signal,” reflecting strong concerns regarding inflation, said Seema Shah, the chief global strategist at Principal Asset Management. Economists who are less worried about inflation are referred to as ‘doves.’

The S&P 500 closed down 0.5% at 6,039.31, the Dow Jones Industrial Average fell 0.31% to 44,713.52, and the Nasdaq dropped 0.5% to 19,632.32.

Powell Responds to Trump’s Demand for Rate Cuts

In response to Trump’s recent assertion that he would “demand a drop in interest rates immediately,” Powell refrained from making comments.

“The public should trust that we will continue to work diligently to achieve our objectives, focusing on our tools and responsibilities,” Powell stated, clarifying that he has not been in communication with Trump.

Powell reiterated the Fed’s commitment to operating independently.

“That will always be our approach, and people should feel confident in that,” he assured.

This decision follows Powell’s earlier remarks at the World Economic Forum where he mentioned he would “demand immediate interest rate cuts” once OPEC takes measures to decrease oil prices, which could indirectly lower inflation.

Trump’s statement sets up a potential conflict with Powell and the Federal Reserve, which functions as an independent entity free from political pressures to ensure optimal economic decisions. Trump had previously urged Powell to reduce interest rates during his first term, although it had little effect on the central bank’s actions.

Why Does the Fed Adjust Interest Rates?

The Fed raises interest rates or maintains them at elevated levels to combat inflation by discouraging borrowing and reducing economic activity. Conversely, it lowers rates to stimulate growth in a struggling economy or to bring rates back down to normal as inflation levels stabilize.

Current Federal Reserve Interest Rate

The decision to hold the Fed’s benchmark short-term interest rate steady follows a series of reductions totaling one percentage point over three consecutive meetings late last year. This has resulted in lowered borrowing expenses for credit cards, some mortgage loans, auto loans, and other borrowing, contributing to a stock market rally. However, it has also reduced the yields on bank savings, which were recently providing more attractive returns.

Is Inflation Actually Decreasing?

After raising the federal funds rate to a 23-year high in an effort to counter a pandemic-driven price increase in 2022 and 2023, the Fed has since reduced rates as its preferred inflation measure decreased from 5.6% in early 2022 to 2.8% in November—yet still misses the 2% target.

However, inflation has remained stagnant at this level in recent months, with economists forecasting a report that will reflect a similar statistic. This has led Fed officials to project fewer rate adjustments moving forward , cuts and a pause at this week’s meeting, separate from Trump’s policies.

However, the monthly increase in costs has been more controlled, which is expected to lead to milder annual price increases in the first half of 2025, thanks to favorable year-over-year comparisons, according to a Goldman Sachs research note. This situation could allow the Fed some flexibility to reduce interest rates again within a few months.

What is the current job market status?

The job market saw increased activity in December, with employers adding 256,000 jobs and the unemployment rate decreasing. Nevertheless, hiring rates have fallen below pre-pandemic figures, with substantial job growth mainly attributed to low layoff rates, which may indicate an impending slowdown.

This week, the government is anticipated to reveal that the economy grew at a robust annual rate of nearly 3% in the fourth quarter and for the entirety of 2024.

How many rate cuts are anticipated in 2025?

Economist Ryan Sweet from Oxford Economics suggested that the Fed could potentially agree to three quarter-point rate cuts this year, commencing as early as March, if inflation continues its downward trend and the job market shows signs of slowing.

Fed Governor Chris Waller recently stated in an interview with CNBC that he wouldn’t dismiss the idea of a rate cut in March. “As long as the inflation data remains positive, I can definitely see cuts happening sooner than the market expects,” he mentioned. He also expressed that he does not anticipate tariffs having a significant impact on inflation.

Both the median prediction from Fed officials and futures markets are leaning towards two rate cuts this year, with markets speculating that the first cut could happen in June.

However, some Fed members have suggested that the latest high inflation levels indicate a need for caution, especially given a strong economy that doesn’t seem to require assistance from the Fed. Including possible tariffs that might be passed on to consumers as higher prices, alongside an immigration crackdown that could tighten labor supply and raise wages, these policies could lead to renewed inflation in the latter part of the year, according to Barclays.

Deutsche Bank predicts that 25% tariffs on imports from Canada and Mexico could elevate inflation nearly a full percentage point to 3.7% by year’s end. Additional tariffs on China might further increase inflation.

As a result, Barclays forecasts only one rate cut in June, while Deutsche Bank anticipates none. Barclays posits that a shift towards rate hikes could be plausible if Trump’s proposed tax policies stimulate the economy while tariffs and deportations elevate inflation expectations, thereby driving inflation higher.

Conversely, other analysts predict only a minor increase in prices due to tariffs, arguing that a reduction in imports could fortify the dollar, thereby lowering import costs for Americans and partially counterbalancing the tariffs.

In a worst-case scenario, both tariffs and deportations could spark inflation while simultaneously inhibiting consumer spending and economic growth. This would create a challenging situation for the Fed—whether to retain high rates to combat inflation or to lower them to stimulate the economy.

What impact will Trump’s economic initiatives have on interest rates?

President Donald Trump’s strategies to reduce taxes, impose significant tariffs on imports, and deport millions of undocumented immigrants have created substantial uncertainty concerning the trajectory of the economy, inflation, and interest rates.

YSL News has previously analyzed several scenarios arising from Trump’s economic policies.

One potential scenario suggests that his policies could slightly increase inflation while the economy decelerates yet still shows solid growth, possibly leading the Fed to implement two or three rate cuts this year.

Alternatively, Trump’s actions might more significantly drive inflation higher while the economy sees robust growth or even accelerates, likely resulting in fewer rate cuts—perhaps none at all. Some forecasts suggest a return to rate hikes in such a case.

Another scenario may involve Trump’s plans causing increased inflation while simultaneously weakening the economy, a rare combination that would present a complex choice for the Fed: reduce rates, raise them, or maintain the current levels?

Fed is ‘reviewing’ Trump’s orders on DEI

During a conference in 2021, Powell expressed his belief that organizations with a strong commitment to diversity and inclusion tend to perform better.

On Wednesday, Powell reiterated this belief, stating that the Fed is currently reviewing Trump’s executive order aimed at terminating diversity and inclusion initiatives within the federal government.

“We are making an effort to adjust our policies in alignment with the executive orders wherever appropriate and in accordance with applicable laws,” he stated.

Powell speaks on Fed staffing matters

Last month, Elon Musk, CEO of Tesla and head of the Department of Government Efficiency, criticized the Fed for being “absurdly overstaffed.”

When asked for his thoughts on this, Powell mentioned that the Fed follows a “very careful budgeting process.”

“We owe it to the public, and we believe we are doing just that,” he stated.

Why might the Fed halt interest rate cuts?

In late 2024, the Fed decided to cut its benchmark interest rate three times in a row during successive meetings.

Why might they stop now?

If the Fed suspends its trend of lowering interest rates, considerations regarding inflation will greatly influence this decision. Consumer prices have risen recently, albeit at a slower rate than seen in most of 2022 and 2023. The ideal inflation target set by the Fed is an annual rate of 2%. As of December, the current inflation rate stands at 2.9%, representing the highest level in five months.

Despite the Fed implementing their last rate cut of 2024 at their December meeting, they indicated a notably slower pace of cuts for 2025, citing ongoing inflation and strong economic growth.

During this meeting, the Fed anticipated only two rate cuts for 2025, reduced from the four previously planned in September.

Is there a future decline in interest rates likely?

The Fed’s decision to maintain interest rates means American consumers might have to wait for some time before witnessing a reduction in borrowing costs across the board.

“Anyone expecting the Fed to arrive as a savior and resolve high-interest rates in the near future is going to be very disappointed,” cautioned Matt Schulz, chief credit analyst at LendingTree. “This applies whether you’re referring to mortgages, auto loans, credit cards, or nearly anything else. As a result, it is increasingly important to manage high-interest debt carefully.”

Currently, the average annual interest rate on new credit cards stands at 24.26%, according to LendingTree. This exemplifies significant high-interest debt.

Meanwhile, the average interest rate for a fixed-rate 30-year mortgage is 6.65%, per Zillow, and Bankrate measures the national average at 7.05%. In either case, mortgage rates are considerably higher now compared to three or four years ago when they were at historic lows.

What drives the Fed’s decisions to change interest rates?

According to the Federal Reserve Bank of Cleveland, “Part of the mission given to the Federal Reserve by Congress is to maintain price stability. This entails not allowing prices to fluctuate too rapidly.”

When inflation is elevated, the Fed usually raises interest rates to cool down the economy and stabilize inflation. Conversely, when inflation is low, the Fed may lower interest rates to invigorate the economy and encourage an increase in inflation.

The central bank also reduces rates to stimulate a sluggish economy and job market or simply to provide the economy with some breathing space. Economists suggest this is the approach the Fed has been taking over the past year.

Why did the Fed reduce interest rates in 2024?

The Fed raised interest rates to a 23-year peak of 5.25% to 5.5% to combat a historic rise in inflation. After maintaining this rate throughout parts of 2023 and 2024, the Fed began lowering its benchmark rate in September, signaling that inflation was becoming more manageable. The annual inflation rate has decreased from a peak of 9.1% in mid-2022 to 2.9% in December: still higher than the Fed’s desired 2% inflation target but improved overall.

A series of interest rate cuts lowered the benchmark federal funds rate by a full percentage point between September and December 2024, now sitting within the 4.25% to 4.5% range.

(This story has been revised with new details.)