After their first policy meeting of the second Trump administration, the Federal Reserve kept interest rates unchanged. Despite pressure from President Donald Trump on officials to decrease rates, that choice was made.
One hint at the central bank’s justification: It took a more cautious stance on inflation in its press release announcing the decision, which experts usually interpret as an indication of the way forward. In their last report, officials took off a portion stating that inflation has moved closer to their 2% target, stating merely that it is still fairly high on Wednesday.
In a news conference after the announcement, Federal Reserve Chair Jerome Powell stated that while recent inflation data appeared to be positive, we shouldn’t overreact to two positive or two negative [inflation] readings.
Following the ruling, interest rates for many borrowers with anything from mortgages to vehicle loans became uncomfortably high, causing all three major stock indices to plummet. In December, consumer prices were 2.9% higher on average than they were during the same period last year. This yearly pace has been above the Fed’s 2% target for months.
In keeping with his long-standing practice of making his opinions on monetary policy public, which U.S. presidents have historically avoided in order to preserve the Fed’s independence from politics, Trump made the choice days after increasing pressure on the central bank over interest rates.
Last week, during a videoconference to the World Economic Forum in Davos, Switzerland, Trump declared that he would insist on an immediate reduction in interest rates.
In follow-up remarks following his Davos speech, he stated, “I know interest rates much better than they do.” Additionally, he reiterated his criticism of Powell, whom he nominated in 2017 and has vowed not to fire before Powell’s term expires in May 2026.
The Fed chairman said reporters on Wednesday that he would not comment on the president’s remarks regarding interest rates in any way. The public should have faith that we will carry on with our work as usual.
Powell added that he hasn’t spoken with Trump directly. The greatest way for a central bank to function is through independence, according to a lot of study, he continued.
Since Trump departed office in January 2021, the U.S. economy has undergone significant transformation, and the nation is still dealing with the Covid-19 outbreak and acrimonious debates regarding lockdown protocols to battle it.
Inflation has significantly decreased following a price spike during the epidemic that severely damaged the budgets of many households. After companies added more than a quarter-million jobs, unemployment decreased slightly to 4.1% in December from 4.2% the previous month, allaying concerns about a labor market that has held up well despite cooling.
Meanwhile, despite households’ growing emphasis on value, consumer expenditure has remained stable. Federal researchers said in December that the GDP, which is mostly driven by the consumption of goods and services, had increased by at least 3% for two consecutive quarters.
These and other indicators, according to analysts, show that the economy is still doing well in spite of the challenging final mile in the inflation struggle, which would lessen the need for a new Fed boost just yet. After reducing rates for three straight meetings, the central bank has scheduled two rate cuts this year, bringing its benchmark rate down from a 20-year high range of 5.25%–5.5% to the current level of 4.25%–4.5%.
Powell stated on Wednesday that he believes disinflation will continue on a gradual and occasionally rocky path. We don’t have to change our policy position quickly.
Greg McBride, Chief Financial Analyst of Bankrate, stated the matter more simply: He noted in a statement on Wednesday that the Fed is aware that the pace of progress toward 2% inflation has slowed. In their post-meeting statement, they made no mention of the likelihood of rate reduction being resumed at the upcoming meeting in March. When that time comes, we will need a string of strong inflation numbers to get there.
According to economists, it has become increasingly difficult to maintain borrowing costs high enough to restrain price increases without causing the economy to enter a recession.That is mostly because of Trump’s economic agenda, especially his tariffs, of which his first policy action is anticipated on Saturday.
When asked about the possible effects of tariffs on the economy, Powell responded that there are many options.
We don’t know which countries, how much, or how long. We are unaware of reprisal. “We’re not sure how it will trickle down to consumers through the economy,” he said.
Whatever the final result, it is obvious that the Trump administration’s immigration and trade policies will influence the central bank’s actions this year. Ahead of the interest rate announcement on Tuesday, Joe Brusuelas, chief economist at the financial firm RSM, wrote in a note. The Fed’s long-held 2% inflation objective would be at jeopardy if these actions resulted in greater inflation or, more importantly, increased inflation expectations.