The Federal Reserve system on Wednesday, January 29, decided to keep its key interest rate at the same level.
The mentioned decision by the US financial regulator suspends the process of consistent monetary policy easing that began in the second half of last year. The central bank of the United States is currently paying attention to the complex political landscape. Economic uncertainty has also become a factor impacting the decision of the US central bank in the context of monetary policy. The prevailing opinion among experts is that the implementation of the intention repeatedly declared by the President of the United States, Donald Trump, to impose tariffs on imported goods will accelerate inflation in the country. At the same time, it is still unknown to what extent will the relevant plan be implemented and whether will there be retaliatory measures from countries affected by Washington’s tightened trade policy. Moreover, against the background of the currently observed geopolitical tensions, the global economy as a whole is facing significant uncertainty.
The Federal Open Market Committee left its overnight borrowing rate in a range between 4.25%-4.5%. As many experts predicted, the corresponding indicator has not changed since the January meeting of the central bank of the United States on monetary policy.
In September last year, the US financial regulator began lowering the cost of borrowing. In 2024, the central bank of the United States made three interest rate-cutting decisions. The corresponding indicator was reduced by a whole percentage point. It is worth noting that some experts assumed that the central bank of the United States would adhere to a strategy involving a more moderate scale of actions in the framework of monetary policy easing.
It is worth noting that the January Fed meeting was the first after the inauguration of US President Donald Trump. It is also worth noting that Mr. Trump has repeatedly criticized the financial regulator of the United States. He also officially stated that, in his opinion, the Fed should cut interest rates.
In the statement released following the meeting of the central bank of the United States, there were several clues about the reasons for the decision not to lower the cost of borrowing. In this case, attention was drawn to the favorable situation in the labor market. At the same time, the Fed is no longer showing past optimism in the context of expectations regarding the dynamic of inflation. A statement released after the December meeting of the central bank of the United States noted the progress of the specified indicator towards achieving the financial regulator’s target of 2%. In January, the Fed did not mention this. Probably, the central bank of the United States has become less optimistic about the prospects of the dynamic of inflation. It is possible that uncertainty has become a factor of impact in this case. The central bank of the United States noted that inflation remains somewhat elevated.
The US financial regulator also stated that the unemployment rate has stabilized at a low level in recent months. Moreover, the Fed underlined that labor market conditions remain solid.
It is worth noting that a stronger labor market and stubborn inflation, in general, are not some kind of active incentive for the central bank of the United States to continue cutting interest rates.
The statement from the US financial regulator also noted that the country’s economy continues to show growth at a solid pace.
It is worth noting that Fed officials have made many statements recently that clearly indicate their concern that progress in bringing down inflation may have stalled. Also, some of them intend to assess the impact of previous lowering of the cost of borrowing on the economic situation. At the same time, most officials of the central bank of the United States expect further interest rate cuts in 2025.
As for the political situation in the US, according to media reports, there is a lack of stability in this case. In addition to his stated intention to impose tariffs on imported goods, Donald Trump also ordered a wave of deportations of those who illegally cross the border, and has put forth a series of deregulatory measures.
Last week, Mr. Trump expressed confidence that he would be able to bring down inflation. The US president also noted the intention to demand to cut interest rates immediately.
Donald Trump has no authority over the central bank of the United States. He can nominate board members. At the same time, Donald Trump’s statements signal a potentially contentious relationship with the policymakers. It is worth noting that a similar situation was observed during the first presidential term of Mr. Trump.
The Fed has made significant progress in combating rising inflation. In the middle of 2022, the corresponding indicator reached a 40-year peak. Over time, inflation began to move on a downward trajectory. However, the Fed’s 2% target has not yet become an objective fact of economic reality. The central bank of the United States preferred pricing gauge showed headline inflation rose to 2.4% in November. This indicator is the highest since July. At the same time, the core measure, which does not take into account food and energy prices, held at 2.8%.
Traders demonstrated maximum confidence that at the January monetary policy meeting, officials of the central bank of the United States would not make a decision on any change in interest rates. They also do not expect the US financial regulator to lower borrowing costs until June.
According to CME Group data, markets are pricing in a funds rate of about 3.9% by the end of 2025, implying a 61% probability of two quarter-percentage-point cuts this year.
In 2024, the economic system of the United States showed solid growth. Also last year, consumer spending in the US held up well. The gross domestic product (GDP) of the United States grew by 2.3% in the fourth quarter of 2024 compared to the figure recorded for the same period in 2023. This is evidenced by data released by the Atlanta Fed.
The January meeting also featured a changed voting composition on the Federal Open Market Committee. Fed’s chairman Jerome Powell and the other seven board of governors members are joined this year as voters by regional presidents Austan Goolsbee of Chicago, Alberto Musalem of St. Louis, Susan Collins of Boston, and Jeffrey Schmid from Kansas City.
On Wednesday, during a speech at a press conference, Mr. Powell said that the central bank of the United States does not need to rush to adjust its policy stance. He also noted that the current configuration of monetary policy is well-positioned for the challenges at hand. Moreover, Jerome Powell stated the risk of cutting interest rates too aggressively. In this context, he noted that reducing policy restrictions too fast or too much could hinder progress in combating inflation.
Currently, the Fed is taking a kind of wait-and-see attitude. Officials of the central bank of the United States are awaiting further data on inflation and employment. They also have not yet formed a definitive understanding of the impact of Donald Trump’s policies on the economic situation.
It is worth noting that the Fed’s current position can be described as hawkish in a certain sense. In this case, the central bank of the United States holds the view that even a little jolt in interest rates can throw the economy off the equilibrium.
In general, the Fed is characterized by a cautious approach to changes in monetary policy. As part of the appropriate approach, officials of the central bank of the United States initially receive data on the economic situation and only after that make a decision on interest rates.
As we have reported earlier, Fed’s Susan Collins Supports Gradual Approach to Rate Cuts.
