The Federal Reserve Hits Pause

To no one’s surprise, the Fed held interest rates steady today after cutting them by 100 basis points over the past three meetings. All 86 forecasters surveyed by Bloomberg called the hold.

In fact, it was pretty much a given once the Fed released its latest Summary of Economic Projections at its last meeting on December 18. It signaled just two 25-basis-point cuts in all of 2025. On top of that, recent economic data showed that the job market is still holding up and inflation remained sticky in December. None of these things argued in favour of a rate change.

Our own economic outlook hasn’t changed much since mid-December. The data set for release over the next few days should show solid real GDP growth for Q4 2024 and relatively flat PCE inflation. As a result, Jerome Powell said at today’s press conference that the Fed doesn’t need to be in a hurry to adjust its policy stance.

The new Trump administration will obviously have a major impact on the economy this year. The fact that it hasn’t yet acted on tariffs is something of a relief, but it’s too early to say exactly how its immigration, energy and regulatory policies will affect economic activity and inflation. Like us, Fed officials are probably looking for more clarity on that front. So far, the Fed doesn’t seem too concerned about the rise in some indicators of short-term inflation expectations, which may reflect the anticipated consequences of the new administration’s policies.

As for Fed independence, last week President Trump said he wants interest rates cut once oil prices come down. In response to a question about this today, Powell said, “the public should be confident that we will continue to do our work as we always have, focusing on using our tools to achieve our goals and, really, keeping our heads down and doing our work.”