The Federal Reserve announced it will keep interest rates at the same level set last month, a move widely anticipated by financial markets – though it defies the wishes of President Donald Trump.
Fed Chairman Jerome Powell
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Key Facts
The policy-setting Federal Open Market Committee agreed unanimously to hold the target federal funds rate at 4.25% to 4.5%, the U.S. central bank announced Wednesday afternoon following the conclusion of the FOMC’s two-day meeting.
The pause breaks a three-meeting streak of cuts dating back to September, when the Fed rolled out its first rate cut since March 2020.
The FOMC announcement noted unemployment “has stabilized at a low level” and “inflation remains somewhat elevated,” notably removing a reference from its prior rates decision of inflation making “progress” toward the 2% target.
Investors widely anticipated the Fed would hold rates firm, pricing in 99.5% odds of a pause ahead of the announcement, according to CME Group’s FedWatch Tool, which tracks derivatives trades on monetary policy.
Key Background
Wednesday solidifies the significantly scaled back expectations of much lower rates, with the Fed holding rates well above the sub-3% level they stood from 2009 to 2021. The Fed is maintaining restrictive monetary policy as inflation stands above its 2% target for 45 consecutive months and counting, while economic growth has remained resilient and unemployment relatively low despite higher rates, making cuts less pressing to jumpstart the economy. The Fed only directly controls the rate at which financial institutions can loan their reserve funds to one another, but borrowing costs from mortgages to corporate loans tend to move in the same direction as the central bank-determined rates. The December FOMC meeting shook U.S. markets as Fed staff’s median forecast called for just 0.5 percentage points of cuts in 2025, a decrease from the prior forecast of a full percentage-point cut, and Fed Chairman Jerome Powell said it was a “closer call” whether to even lower rates at that meeting. That concerned investors hungry for lower rates as cheaper loans help corporate profit margins, as the S&P 500 stock index declined 3%, its second-worst day of 2024.
Crucial Quote
It’s a “boring start to a tumultuous year for the Fed,” JPMorgan Chase’s chief U.S. economist Michael Feroli wrote in a client note previewing the Fed announcement.
Chief Critic
Wednesday’s meeting may have been routine, but the Fed’s high-profile headbutting with Trump is not. Last week, Trump said virtually at the World Economic Forum he’ll “demand that interest rates drop immediately,” echoing prior comments on his belief the president should “have…say” on monetary policy. And this year’s Fed decisions will likely “hinge in large part on how the Committee chooses to handle tariffs,” according to Goldman Sachs chief U.S. economist David Mericle, setting the stage for the impact from perhaps Trump’s most prominent economic policy on rates moving forward as the import taxes potentially pose a further roadblock to taming inflation.