The United States Federal Reserve opted to maintain its benchmark interest rate on Wednesday (Thursday AEDT), halting a recent trend of policy easing as it assesses evolving economic and political conditions.
In a widely expected decision, the Federal Open Market Committee (FOMC) kept the federal funds rate unchanged within a range of 4.25% - 4.5%. This move follows three consecutive rate cuts since September 2024, totaling a full percentage point reduction.
The meeting also marked the first since Donald Trump, a frequent Fed critic, assumed the presidency and called for immediate rate cuts.
The post-meeting statement provided insights into the Fed's rationale, offering a more optimistic view on the labour market but omitting a key phrase from December’s statement that inflation "has made progress toward" the 2% target.
"The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid," the statement read.
A robust labour market and persistent inflation reduced the urgency for further policy easing. The Fed reiterated that the economy "has continued to expand at a solid pace".
During a press conference, Fed Chair Jerome Powell stated that the labour market has not significantly contributed to inflationary pressures, noting that the central bank would require "real progress on inflation or some weakness in the labor market before we consider making adjustments".
Markets reacted negatively, with stocks declining following the Fed’s decision to maintain rates.
Recent comments from policymakers reflect concerns that inflation progress may have stalled. Officials have also indicated a need to evaluate the effects of previous rate cuts before proceeding with further reductions, though most still anticipate some easing in 2025.
The decision was made amid a politically charged environment. Since taking office, Trump has issued hundreds of executive orders, including tariff policies, immigration enforcement measures, and deregulation efforts.
Last week, Trump stated his confidence in lowering inflation and declared he would demand rate cuts immediately. While the president holds no direct authority over Fed policy aside from nominating board members, his comments suggest potential tensions with the central bank, echoing his first-term clashes with Powell.
Powell confirmed he has not had any contact with Trump regarding monetary policy.
While inflation has declined significantly from its 40-year peak in mid-2022, it remains above the Fed’s 2% goal. The central bank’s preferred inflation gauge showed headline inflation rising to 2.4% in November, the highest since July, while core inflation, excluding food and energy, held steady at 2.8%.
Traders had widely expected the Fed to maintain rates at this meeting. Current market pricing suggests no further cuts until at least June, with a year-end projection of a 3.9% funds rate, indicating a 61% probability of two quarter-point cuts in 2025, according to CME Group data.
The meeting also marked a shift in the FOMC’s voting members. Powell and the Board of Governors were joined by new regional presidents: Austan Goolsbee (Chicago), Alberto Musalem (St. Louis), Susan Collins (Boston), and Jeffrey Schmid (Kansas City). The vote to keep rates steady was unanimous.
