Federal Reserve holds interest rates steady as inflation remains above 2%

The Federal Reserve said Wednesday that it will leave its benchmark rate unchanged, hitting the brakes on lowering borrowing costs for individuals and businesses after a flurry of rate cuts starting last fall.

The Fed said it will maintain the federal funds rate at its current range of 4.25% to 4.5%. The decision comes after the central bank trimmed rates three times starting in September 2024, which has pushed down the federal funds rate — the rate banks charge each other for short-term loans — by one percentage point.

The pause, the Fed’s first rate decision since President Trump returned to office on Jan. 20, comes as economists predict the central bank is likely to take a wait-and-see approach to the president’s economic policies, given that some, such as higher tariffs, could prove inflationary.

The Fed’s decision to keep rates steady reflects stubborn U.S. inflation, which remains close to 3% on an annual basis. That has fueled concerns that additional rate cuts could reignite price increases, making it more difficult to get to the Fed’s 2% target. Notably, the Fed removed a line from its December statement expressing its belief that inflation “has made progress” toward its goal. Yet Powell struck a more dovish tone in a press conference to discuss the Fed’s decision.

“Longer-term inflation expectations appear to remain well-anchored, as reflected in a broad, broad range of surveys of households, businesses and forecasters, as well as measures from financial markets,” he said. 

Powell also described the economy as “in quite a good place,” citing growing GDP, solid job gains and a low unemployment rate, as well as signs of inflationary pressures easing. “We don’t need to be in a hurry to adjust our policy stance,” he added.

“Pressing the pause button,” noted Lindsay Rosner, head of multisector fixed-income investing at Goldman Sachs Asset Management. “[T]he FOMC will want to see further progress in the inflation data to deliver the next rate cut highlighted by the fact they removed the reference on inflation making progress.”

See Managing Your Money for more on the Fed’s move to stand pat on interest rates.

In the meantime, inflation-weary consumers won’t get much relief from still-high borrowing costs, especially if the Fed holds off on additional rate cuts later in 2025, as many economists and Wall Street analysts forecast. With the Fed hitting the pause button, it’s unlikely that consumers will see lower borrowing costs on credit cards or other forms of debt, even as more households struggle to pay their bills.

“[L]ower- and middle-income households are facing mounting pressure, as evidenced by an increase in credit card and auto loan delinquencies,” Joe Gaffoglio, CEO of Mutual of America Capital Management, said in an email. 

When will the Fed cut rates?

The Fed may hold off on cutting rates until its May 7 meeting, according to economists polled by financial-data firm FactSet. That means the central bank is expected to hold rates steady at its next meeting on March 19. 

“If the Fed doesn’t resume cutting in the next few months, however, we suspect the window will have closed,” Paul Ashworth of Capital Economics said in a report. “While markets are still pricing in second half rate cuts, our view is that a flurry of tariffs will put a stop to that, as inflation rebounds to 3%.”

Asked about the possible impact of Mr. Trump’s economic plans, Powell demurred, noting that while the Fed is monitoring the new administration’s policies, it’s too early for the central bank to make an assessment of their possible impact. Mr. Trump has vowed to enact a broad tariff of 10% on all imports, as well as to imposed 25% tariffs on Canada and Mexico as soon as Feb. 1.

“We need to let those policies be articulated before we can even begin to make that a plausible assessment of what their implications for the economy will be,” he said. “We don’t know what’s going to be tariffed, we don’t know for how long or how much, what countries, we don’t know about retaliation.”

Asked by CBS News’ Richard Escobedo about economic uncertainty created by Mr. Trump’s plan to deport undocumented immigrants, Powell responded that the administration’s efforts are not yet showing up in economic data.

“Businesses that are dependent on immigrant labor are saying that it’s suddenly gotten harder to get people,” the Fed chair said. “But again, you don’t see that in the aggregate data, but yes, you hear it anecdotally.”

While inflation has subsided from a 40-year high of 9.1% in June 2022, it rose 2.9% in December on a year-over-year basis due to higher prices on gasoline, which rose 4.4% from the prior month, as well as food and housing.

In its statement, the Fed described the labor market as “solid,” with an unemployment rate that has “stabilized at a low level in recent months.” Even so, the Fed is closely monitoring the labor market for signs of weakness, with the central bank pointing to a rise in the jobless rate last fall as one reason why it opted to cut rates at the time.

“The Fed will keep their options open in case a sudden weakening materializes in the months to come” in the labor market, noted Bankrate chief financial analyst Greg McBride in an email. 

As for when the next rate cut might come, it’s unclear from the Fed’s statement, he added. 

“They gave no indication in their post-meeting statement that a resumption of rate cuts is likely at the next meeting in March,” McBride said. “It will take a run of good inflation data to get us there, whenever that may be.”