Fed holds rates steady, pausing for further inflation progress

Federal Reserve officials held interest rates steady, pausing to assess the inflation outlook following a string of rate reductions last year.

The Federal Open Market Committee voted unanimously on Wednesday to keep the federal funds rate in a range of 4.25%-4.5%, after lowering rates by a full percentage point in the final months of 2024.

In a post-meeting statement, officials repeated that inflation remains “somewhat elevated” but removed a reference to it having made progress toward their 2% goal. They also noted the unemployment rate has stabilized at a low level.

Strong economic growth coupled with a solid labor market allows officials to wait for further evidence of cooling inflation before adjusting rates again. It also offers them time to evaluate how President Donald Trump‘s policies on immigration, tariffs and taxes may impact the economy.

Policymakers reiterated that the risks to their inflation and employment goals are “roughly in balance” and that the “extent and timing” of additional rate adjustments will depend on incoming data and the outlook.

The S&P 500 index of US stocks added to losses on the day, while Treasury yields and the dollar rose. Chair Jerome Powell will speak at a press conference with reporters at 2:30 p.m. in Washington.

The decision came just over a week after Trump’s inauguration. Trump, a frequent critic of the central bank, has already suggested he understands interest rates better than Powell.

Labor Market

The Fed’s characterization of the labor market also differed from the prior month’s policy statement, which had noted an easing in labor market conditions and an increase in the unemployment rate.

“The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid,” according to the latest statement.

Fed officials want to keep some downward pressure on the economy to ensure inflation cools to their 2% target, but a key question for policymakers right now is just how much interest rates are currently restricting activity.

Last month, Fed officials signaled they expect just two rate cuts for all of 2025, a shallower path of reductions than previously anticipated. Investors echo this view, betting on one cut by the Fed’s June meeting and another by the end of the year, according to futures markets.

Policymakers will update their projections on the economy and rates at their next meeting in March.

Inflation Outlook

This month’s pause in rate cuts comes amid increasing uncertainty about how inflation will evolve.

While progress toward the central bank’s inflation goal stalled in the last few months of 2024, the new year has brought signs that the downward trend may soon resume.

Data published earlier this month showed an underlying measure of consumer prices rose by less than expected in December, marking the first stepdown in six months. That and other data have driven economists to estimate that figures due Friday will show the core personal consumption expenditures price index, which excludes food and energy, rose just 0.2% last month.

At the same time, Trump’s tariff threats are injecting uncertainty into the outlook, with some economists warning they’ll be inflationary and others — including Fed Governor Christopher Waller — arguing the impact on inflation will generally be small and short lived.

In December, Powell said some Fed officials had started incorporating potential government policies into their economic projections. Minutes from that gathering showed “almost all” participants noted the upside risks to the inflation outlook had increased, in part due to potential changes in trade and immigration policy.

Four regional Fed bank presidents rotated into voting positions on the central bank’s rate-setting committee at this week’s meeting. Chicago Fed President Austan Goolsbee, Boston Fed chief Susan Collins, Alberto Musalem of the St. Louis Fed and Kansas City Fed President Jeff Schmid will vote on policy in 2025, alongside their seven colleagues on the Board of Governors and New York Fed President John Williams.

The Fed maintained the monthly cap on the amount of Treasuries it allows to mature each month without being reinvested at $25 billion, while keeping the cap for mortgage-backed securities unchanged at $35 billion.