Adds Powell comments.
The US Federal Reserve today paused in its course of rate cuts begun last year while signaling it would wait to see the impacts of President Donald Trump's new policies — ranging from tariffs to expulsions of foreign farm workers — on the labor market and inflation before considering any changes to its "policy stance."
In its first meeting of 2025, the Fed's Federal Open Market Committee (FOMC) held its federal funds rate unchanged at 4.25-4.50pc after cutting it by a quarter point each in December and November last year following a half-point cut in mid-September, the first cut since 2020.
"In the current situation, there is probably some elevated uncertainty because of, you know, significant policy shifts in those four areas that I mentioned: tariffs, immigration, fiscal policy and regulatory policy," Fed chairman Jerome Powell told reporters.
"The committee is very much in the mode of waiting to see what policies are enacted," Powell said. "We need to let those policies be articulated before we can even begin to make a plausible assessment of what their implications for the economy will be."
"The economy is strong, the labor market is solid and the downside risks to the labor market we think has abated and continues on a sometimes slow and bumpy path," Powell said. "The broad sense of the Committee is we don't need to be in a hurry to adjust the policy stance."
In December, the Fed penciled in 50 basis points worth of cuts for 2025, down from 100 basis points projected in the September median economic projections of Fed board members and Fed bank presidents.
Fed fund futures have also indicated a likelihood of only 50 basis points of rate cuts this year on strong job growth and an uptick in inflation at the end of last year, along with concerns over Trump's plans to hike tariffs, expel illegal immigrants — many of whom work in agriculture, construction and services industries — and cut taxes. Those are all measures economists say are likely to unleash inflation and boost interest rates.
Powell said Fed policymakers had heard that "businesses that are dependent on immigrant labor are saying that it is suddenly getting harder to get people," but that it had not showed up yet in aggregate labor data.
Trump during his first term was openly critical of the Fed, which is independent of the executive branch, saying he wants a "say" in making monetary policy.
"With oil prices going down, I'll demand that interest rates drop immediately, and likewise they should be dropping all over the world," Trump told the World Economic Forum last week in Davos, Switzerland.
Asked if the Fed would continue to act independently of the executive branch, Powell replied: "This is who we are, this is what we do. We study the data, we analyze how it will affect the outlook, and the balance of risks, and we use our tools."
The consumer price index (CPI) accelerated to an annual 2.9pc in December, a third month of gains from 2.4pc in September, which was the lowest since early 2021 before the economic reopening after Covid-19 lockdowns caused a supply-chain shock that sent CPI as high as 9.1pc in June 2022. The Fed, slow to react, began a series of rate hikes in March 2022 that took the target rate from near zero to more than five percentage points higher by July 2023, keeping it at 5.25-5.5pc through August 2024.
By Bob Willis
