Federal Reserve Holds Rates Steady, Signals Cautious Approach to Future Adjustments
The Federal Reserve opted to maintain interest rates unchanged on Wednesday, while simultaneously acknowledging improvements in the US economy and indicating a more measured approach to potential future policy adjustments.
The Federal Open Market Committee (FOMC) voted 10-2 to keep the benchmark federal funds rate within a range of 3.5%-3.75%. This decision came despite dissent from Governors Christopher Waller and Stephen Miran, who favored a quarter-point reduction.
In a statement released following the meeting, policymakers noted that “job gains have remained low, and the unemployment rate has shown some signs of stabilization.” Significantly, officials removed language from previous statements that highlighted increased downside risks to employment.
This upgraded assessment of the labor market is expected to temper expectations for a near-term rate cut, even amidst growing pressure from the Trump administration. Prior to the meeting, market observers largely anticipated another cut was unlikely before at least June.
Financial markets reacted modestly to the news. Bond yields remained largely unchanged, with 10-year yields holding steady at approximately 4.25%. The dollar experienced a slight dip from its daily high, following earlier comments from Treasury Secretary Scott Bessent advocating for a strong-dollar policy. The S&P 500 also showed little movement throughout the day.
During a press conference after the meeting, Fed Chair Jerome Powell emphasized a “clear improvement” in the outlook for the US economy in the coming year.
“The outlook for economic activity has improved, clearly improved since the last meeting, and that should matter for labor demand and for employment over time,” Powell stated.
While acknowledging signs of stabilization in the labor market, the Fed chief cautioned against overinterpreting the data, noting continued indications of cooling. He declined to specify what conditions would prompt the committee to consider another rate cut.
“We’re not trying to articulate a test when to next cut or whether to cut at the next meeting,” Powell explained. “What we’re saying is we’re well positioned as we make decisions meeting-by-meeting, looking at the incoming data, evolving outlook and all that.”
Wednesday’s decision was largely anticipated, building on a series of three consecutive rate reductions in the closing months of 2025. While most officials, based on projections from December, anticipate further cuts later this year, concerns regarding still-elevated inflation and the stabilizing labor market have led several policymakers to suggest no immediate action is necessary.
The committee’s statement reflected a more optimistic view of the economy, describing the pace of growth as “solid”—an upgrade from the “moderate pace” cited in October. Officials also removed a previous reference to rising inflation.
Addressing inflation, Powell described the overall situation as “modestly positive,” despite projecting that the Fed’s preferred measure of core price increases will likely reach 3% by the end of 2025, exceeding the target by a full percentage point.
However, he added that “most of the overshoot was in goods prices, which we think is related to tariffs, and ultimately, we think those will not result in inflation, as opposed to a one-time price increase.”
Political Backdrop
The press conference was marked by Powell’s careful avoidance of direct responses to questions regarding the escalating political pressures surrounding the central bank, including the Department of Justice’s criminal investigation into the Fed chair.
The DOJ issued subpoenas to the Fed earlier in the month, prompting a strong response from Powell, who accused the administration of using the investigation as a form of intimidation.
Without directly addressing pressure from the Trump administration regarding interest rates, Powell reiterated his commitment to central bank independence. “The point of independence is not to protect policymakers,” he said. “It’s just an institutional arrangement that has served the people well.”
When asked about his plans to remain on the Fed’s Board of Governors after his term as chair expires in May, Powell stated he had not yet made a decision and declined to provide a timeline for doing so.
Powell did comment on his attendance at a Supreme Court hearing last week concerning President Donald Trump’s attempt to remove Fed Governor Lisa Cook. “That case is perhaps the most important legal case in the Fed’s 113-year history,” he said. “I thought it might be hard to explain why I didn’t attend.”
Comforting Data
Officials appear to have largely converged on the view that current Fed policy is appropriately positioned, allowing them time to evaluate incoming data on inflation and the labor market.
This represents a shift from recent months, when disagreements over the economic outlook fueled a robust debate regarding the appropriate path for interest rates. Some advocated for cuts to support what they perceived as a fragile labor market, while others urged caution due to inflation concerns.
Recent economic data have offered reassurance to both sides. While hiring remains weak, layoffs have remained relatively low, and the unemployment rate edged lower in December, suggesting potential stabilization in the labor market.
Consumer price figures for December indicated that underlying inflation was lower than expected. However, distortions caused by last year’s government shutdown will not fully resolve until this spring, potentially limiting the confidence officials place in the data.
Several policymakers have argued that the 175 basis points of rate cuts implemented over the past 16 months have brought policy closer to a neutral level—one that neither stimulates nor restrains the economy—reducing the urgency for further reductions.
Stephen Miran, currently on unpaid leave as a top White House economic advisor, remains an exception, estimating that the benchmark rate remains significantly above a neutral setting and advocating for a 150 basis point reduction this year.
Christopher Waller, considered a potential candidate to replace Powell when his term as chair expires in May, has repeatedly expressed concerns about labor market fragility but recently signaled that the Fed need not rush to lower rates again.
