January 30, 2025 3:17 pm

Insert Lead Generation
Nikka Sulton

The Federal Reserve announced it will maintain interest rates at the same level as set last month, a move that was widely anticipated by financial markets but contrary to the preferences expressed by President Donald Trump. This decision, which comes after a period of rate cuts, signifies a shift in the central bank’s approach, given the current economic conditions.

The policy-setting Federal Open Market Committee (FOMC) met and agreed unanimously to hold the target federal funds rate at 4.25% to 4.5%, a range that was set during the previous meeting. This decision, which was announced on Wednesday afternoon following the conclusion of the FOMC’s two-day meeting, marks a pause in the ongoing series of rate cuts. This decision breaks a three-meeting streak of reductions, the first of which occurred in September, when the Fed implemented its first rate cut since March 2020.

In its statement, the FOMC acknowledged that the labour market has stabilised at a low level, indicating strong employment figures. However, the statement also noted that inflation remains somewhat elevated, although this was not unexpected given the current global economic pressures. The Fed notably removed a reference from its prior rate decisions which had suggested inflation was making “progress” toward the 2% target, reflecting some concern over persistent price increases in the economy.

Ahead of the announcement, investors had widely anticipated the Fed would choose to hold rates steady. According to CME Group’s FedWatch Tool, there was a 99.5% probability of a pause, which investors had priced into their expectations. As a result, markets were largely unfazed by the update, with the S&P 500 showing a slight decline for the day. At the same time, benchmark 10-year U.S. government bond yields experienced a modest increase, rising by about two basis points. This stability in the markets reflects the fact that the Fed’s decision was largely expected and comes in the context of broader concerns regarding inflation and economic growth.

This latest decision by the Federal Reserve highlights the ongoing balancing act the central bank faces as it navigates between ensuring stable economic growth, controlling inflation, and addressing the political pressures placed on its decision-making process. Despite calls from President Trump for further rate cuts, the FOMC has opted to pause its reductions, leaving the future path of interest rates uncertain. As the economy continues to evolve, the Fed’s next steps will be closely watched by both financial markets and policymakers.

Wednesday’s meeting may have appeared routine, but the Federal Reserve’s ongoing clash with President Trump remains anything but ordinary. Last week, at the World Economic Forum, Trump reiterated his call for immediate interest rate cuts, emphasising his belief that the president should have a say in monetary policy. This stance has been consistent with his previous comments regarding the central bank’s independence.

According to David Mericle, chief U.S. economist at Goldman Sachs, this year’s Federal Reserve decisions will likely be influenced by how the Committee handles tariffs. Trump’s trade policies, particularly import taxes, could further complicate efforts to control inflation, with the tariffs potentially acting as an obstacle to economic stability. As such, the influence of Trump’s economic policies on the Fed’s decision-making could become a key factor in future rate decisions.

In response to Trump’s remarks, Federal Reserve Chairman Jerome Powell stated that he had had “no contact” with the president and chose not to engage with the criticisms directly. Powell reassured the public, stating, “The public should be confident that we will continue to do our work… keeping our heads down.” His comments highlight the Fed’s commitment to its independent decision-making process, despite external pressures.

Wednesday’s meeting reinforced the sharply reduced expectations for much lower interest rates. With the Federal Reserve keeping rates well above the sub-3% levels that prevailed from 2009 to 2021, it is clear that the central bank is maintaining a restrictive monetary policy. This decision comes as inflation remains above the 2% target for 45 consecutive months, and economic growth has shown resilience. Unemployment also remains relatively low, even with higher rates in place, making cuts less urgent for stimulating the economy.

The Federal Reserve controls the rate at which financial institutions lend reserve funds to each other. However, borrowing costs for everything from mortgages to corporate loans typically follow the same trajectory as the central bank’s rates. The December Federal Open Market Committee (FOMC) meeting sent shockwaves through U.S. markets, as the Fed staff’s median forecast suggested just 0.5 percentage points of cuts in 2025, a reduction from the previous forecast of a full point. Fed Chairman Jerome Powell also indicated that it was a “closer call” whether to even lower rates during that meeting. This news caused concern among investors, particularly those hoping for lower rates that could stimulate corporate profit margins. As a result, the S&P 500 stock index dropped 3%, marking its second-worst day of 2024.

JPMorgan Chase’s chief U.S. economist, Michael Feroli, characterised the situation as a “boring start to a tumultuous year for the Fed.” His assessment highlights the uncertainty surrounding the Federal Reserve’s decisions in the coming months, as markets brace for potential shifts in policy.

 

 

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