The Federal Reserve on Wednesday held its policy rate in a range between 4.25% and 4.5% and said it would remain on pause in the near term.
The Fed set up an inevitable clash with President Trump, who is on record as wanting lower rates.
The Fed’s decisions set up an inevitable clash with President Trump, who is on record as wanting lower rates in contrast with the hawkish pause adopted by the Fed.
Given the inherent upward pressure on pricing that tariffs would bring and the wage inflation that the new administration’s promised restrictions on immigration would spur, the Fed is on the right policy path until it can ascertain the scope of the new immigration and fiscal policies.
Federal Reserve Chairman Jerome Powell was clear in his news conference: “We don’t know what will happen with tariffs, with immigration, with fiscal policy, with regulatory policy.”
That uncertainty has contributed, along with sticky inflation, to the Fed’s shift to a pause in its rate cutting campaign and the adoption of hawkish language, which may be part of the Fed laying the predicate for future rate hikes if needed.
The major takeaway from the Federal Open Market Committee’s policy statement, which was released on Wednesday, was its removal of a reference to inflation making progress toward the central bank’s inflation goal. That change tells one all that is needed to know about the probability of a near-term rate cut.
That particular change is likely to draw the ire of policymakers at the White House.
The current economic and political environment also calls into question the Fed’s approach to setting policy—that is, its data dependency.
The central bank needs to move to a framework that identifies risks around the outlook and provides a range of scenarios to dampen bond market volatility that is surely to ensue once the Trump administration settles on a policy path.
This is why the Fed possesses independence to act in the best interests of the economy.
Revised projections include delayed inflation targets, improved GDP and unemployment forecasts, and flexibility amid fiscal and trade policy uncertainties.
A forward look
Following the release of the FOMC’s policy statement, investors priced in a 30% probability of a rate cut at the Fed’s March meeting, a 45% chance in June, a 28.3% chance in September and a 17% probability in December—all meetings when new Fed forecasts are released.
We think that the first rate cut this year, if it comes at all, will take place in June. Our forecast includes two 25 basis-point rate cuts with one in June and the other in December.
Our preferred model used to estimate the optimal policy rate implies a 3.96% rate, or a range between 3.75% and 4%, which is why we still have two rate cuts on the board.
But the economy will have to slow back toward the long=range growth trend of 1.8% in contrast with the 2.9% of recent years.
Our alternative to our baseline forecast for this year implied a 30% probability that the economy would grow at a pace of 3% or better, which would result in no rate cuts.
Read RSM’s global economic outlook for 2025 in the latest issue of The Real Economy.
While we think that scenario is premature and that growth will slow back toward 2.5%, arguments by the Fed that policy remains restrictive grow harder by the day given robust consumer spending as well as sticky inflation.
Powell took the opportunity in his remarks to address the growing criticism around the relative restrictiveness of the central bank’s policy stance.
Powell also made the case that the central bank can be patient with its approach to modifying interest rates and that the central bank is well-positioned to address risks to the outlook linked to price stability and full employment.
“With our policy less restrictive than it has been and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance,” Powell said.
The takeaway
The Fed will be on hold in the first half of the year pending policy changes from the Trump administration and as inflation remains sticky in its return toward the Fed’s 2% target.
Pencil in March 19 on your calendar because the next Fed meeting, in which it publishes a forecast, will be a potential game changer across financial markets. It will present the perfect opportunity for President Trump to begin pressuring the Fed to bend toward his preference for lower rates.
