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The Federal Reserve on Wednesday hit pause on interest rate cuts in its first key decision of President Donald Trump’s second term.

It’s a move that’s likely to stoke tensions between the central bank and the new president, who has argued that he should have some say in Fed policy.

Central bank officials opted to keep borrowing costs at a range of between 4.25% and 4.5% as they await further progress on inflation, which showed signs of stalling out late last year. Fed officials reached that conclusion in their latest policy statement, omitting a phrase included in the previous statement that said inflation has “made progress.”

Officials have said recently that they’re still confident inflation will eventually reach their 2% target, but the central bank won’t be able to declare victory anytime soon. Fed Chair Jerome Powell said in his post-meeting news conference that an unexpectedly weakening labor market or inflation slowing “more quickly than anticipated” would put rate cuts back on the table.

“We feel like we don’t need to be in a hurry to make any adjustments,” Powell said.

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Even though the Fed is mulling a holding pattern that would delay further rate cuts, the central bank’s thinking on borrowing costs could shift if Trump keeps his promise of slapping 25% tariffs on Mexico and Canada, two of America’s biggest trading partners, on February 1.

Economists are warning that Trump’s stiff tariffs, if enacted, plus mass deportation policies and the focus on boosting domestic oil production, could end up further stoking inflation, undoing some of the progress the Fed has seen in recent years.

Fed officials have already begun to consider potential changes in trade policy when determining their outlook for the economy: “What we can do is what we have done, which is study up on this and look at historical experience, read the literature,” Powell said of tariffs. “And we will have to see how it goes.”

Many investors still expect the Fed to continue cutting interest rates this year, with a few estimating no rate cuts at all in 2025. But every possibility remains on the table, including additional rate hikes.

Here are key takeaways from the Fed’s latest decision.

Powell said he has no “response or comment whatsoever” on Trump’s remarks last week during his speech at the World Economic Forum’s annual gathering in Davos, Switzerland.

The president said “with oil prices going down, I’ll demand that interest rates drop immediately,” then later that same day, he said “I think I know interest rates much better than they do, and I think I know it certainly much better than the one who’s primarily in charge of making that decision,” referencing Powell.

On whether Powell has had any communication with Trump since his inauguration, the Fed leader said he’s had “no contact.” Trump last week said he’ll speak with Powell “at the right time.”

In response to a reporter’s question asking how the Fed will operate under political pressure, Powell said the Fed will remain committed to being independent and continue to base its interest rate decisions on economic data.

“Don’t look for us to do anything else,” he said.

Shortly after Powell finished taking questions from reporters, Trump blasted the Fed and its leader in a post on his platform Truth Social, claiming they “failed to stop the problem they created with inflation” and that the central bank “has done a terrible job on bank regulation.” He added that his policies will come to the rescue, which include shoring up energy production and changing US trade relationships.

Powell made it clear that fears over the job market have faded recently, echoing officials’ statement which said that conditions are “solid.” The latest economic figures show that to be the case with unemployment at a low 4.1% and employers continuing to hire at a brisk pace.

Yet, the Fed chief agreed that it has become difficult for workers to find a job these days, saying that “it’s a low-hiring environment.”

Powell said the Fed has adopted a wait-and-see approach on the possible changes for trade policy, stressing that there are still many key unknowns.

“The range of possibilities is very, very wide,” Powell said. “We don’t know what is going to be a tariff; we don’t know for how long, how much, what countries, and we don’t know about retaliation or how it will transmit through the economy to consumers.”

Trump has promised big changes in economic policy: In addition to the massive tariffs he’s floated, Trump has also called for deregulation and extending his 2017 tax cuts — policies that economists describe as “expansionary.” That means they would likely boost economic growth, increasing the risk of a spike in inflation.

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Trump’s ongoing crackdown on immigration could also have a massive impact on the labor market and the broader economy. Powell said it’s clear that would have an effect on employers that rely on migrant workers.

Put together, the new administration’s policies introduce some uncertainty because it’s not clear how the economy will ultimately respond to Trump’s shock therapy. Powell in his presser said uncertainty is simply a fact of life.

The Fed is tasked with making sense of this new economic landscape. Central bank officials frequently stress that their decisions are data dependent, and avoid commenting on fiscal policy. Powell has said the Fed considers fiscal policy as as given, adjusting monetary policy accordingly.

In late 2018 after the first Trump administration went on a tariff spree, the Fed devised multiple simulations to determine the best path for policy under different tariff scenarios, according to a declassified documents detailing policy alternatives known as the “tealbook.” In most scenarios, the Fed saw it appropriate to “see through” any tariff increases, considering that one-time tariff hikes usually translate to one-time price adjustments.

But in a scenario in which foreign countries enacted retaliatory tariffs and inflation expectations climbed, the Fed judged it appropriate to hike rates.

Recent consumer surveys have shown an uptick in year-ahead inflation expectations, though Powell told reporters that expectations remain in check. He added that the recent increase was likely due to the speculation over the policies of the Trump administration, which could jack up prices.

For now, investors are betting that the Fed will also hold borrowing costs steady in March, though that expectation could change if future figures show that inflation slowed sharply in January and February.
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Source: https://www.cnn.com/2025/01/29/economy/fed-rate-decision-january/index.html