On Wednesday, the US Federal Reserve held its main interest rate at the same level as before. It is navigating economic insecurity and increasing political pressure.
The central bank has made its first decision on policy since Donald Trump’s return to the White House. This administration is pushing for rate reductions to boost growth.
Federal Open Market Committee maintained the benchmark borrowing rate between 4.25% and 4.5% after three successive rate reductions since September 2024, which totaled one full percentage point.
This decision shows that policymakers are cautious as they evaluate inflation trends, the strength of the labor market, and Trump’s aggressive economic policies.
Fed changes tone regarding inflation and the labor market
The central bank has removed from its statement following its December meeting key words that suggested the inflation was progressing towards its target of 2%.
The statement instead noted that the inflation rate remains elevated. This suggests that policymakers have not yet been convinced that price pressures are being controlled.
The Fed also expressed its optimism regarding the job market.
The unemployment rate is at its lowest level since recent months and the labor market remains solid.
The need for rate reductions is less urgent when there’s a strong economy and persistent inflation.
Markets expect that the Fed will ease its monetary policy in the second half of this year. However, the Fed has stressed the importance of evaluating the effects from previous moves before taking any further steps.
Trump puts pressure on the Fed
Trump has been stepping up his political and economic intervention, signing executive orders on immigration, trade and deregulation.
President Obama has publicly demanded rate reductions immediately, saying they’re necessary for boosting economic growth and lowering inflation.
Trump’s comments suggest that, despite the fact the White House does not have direct control over the Fed Chair, the relationship between Powell and Trump is tense, just like it was during his first term.
The markets are watching closely for signs of any political interference with the central bank’s decision making process.
As the timeline for rate cuts remains unclear, stocks are falling.
Wall Street experienced a drop following the Fed announcement. This was due to investor dissatisfaction over the fact that there would be no immediate relief in interest rates.
The traders had priced in the probability that there would be no changes at this meeting, but they expect to see the first reduction in June 2025.
CME Group’s data shows that current market projections show a 61% chance of two rate reductions of a quarter point by the end the year. Interest rates are expected to drop to 3.9% in December.
In 2024 the US economy grew at a steady rate, and consumer spending remained strong.
Atlanta Fed Projects 2.3% Annualized GDP Growth for Q4 of 2024. This was reduced from 3.2%, due to a weakening in private investments.
However, inflation remains a problem.
In November, core inflation (the headline rate of inflation) rose from 2.4% to 2,4%. This is the highest level since July.
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