Fed holds rates steady as Trump tariffs loom, economy hums

(THE HILL) -- The Federal Reserve held interest rates steady on Wednesday after price increases ticked up over the last three months, suggesting inflation may still have some life in it.

Central bankers held rates at a range of 4.25 to 4.5 percent, in line with market expectations. The decision was unanimous among the voting members of the Federal Open Market Committee (FOMC), the panel of Fed officials responsible for setting interest rates.

The CME Fed Watch prediction algorithm based on futures contract prices had the probability of a hold in January at 99.5 percent on Wednesday.

"The Federal Reserve has decided to pump the brakes … with inflation lingering at around 3 percent and strong jobs numbers in recent months," Joe Gaffoglio, head of Mutual of America Capital Management, wrote in a commentary.

The pause in rate reductions comes as President Trump has been elbowing Fed Chair Jerome Powell to keep cutting rates to spur economic growth, reviving the tensions between the White House and the Fed that were a hallmark of Trump's first term.

"I think I know interest rates much better than they do, and I think I know it certainly much better than the one who's primarily in charge of making that decision," Trump told reporters last week, shortly after being sworn into office.

Wednesday's hold follows what many analysts believed to be a "hawkish" rate cut in December that sent stock markets tumbling.

"The S&P 500 slumped by 2.95 percent that day, which was its second-biggest decline in the last two years, so the extent of their hawkishness came as a major surprise for markets," Deutsche Bank analyst Henry Allen and others wrote in a Wednesday analysis.

The Fed cut rates in September, November and December, seeking to spur investment in the economy after holding interest rates around 5.5 percent for a year in response to the pandemic inflation, which climbed as high as 9 percent in 2022.

Inflation has climbed back toward 3 percent, rising from 2.4 percent in September even as the Fed pressed ahead with easing.

Strength in prices and employment conditions caused the Fed to walk back its expectations for monetary easing this year, reducing the number of anticipated quarter-point cuts in December from four to two.

With a new presidential administration and congress in office and the economy still likely processing trillions in pandemic-induced fiscal stimulus, economists have described the current monetary outlook as complex.

"The rate outlook is complicated," UBS economist Paul Donovan noted in a Wednesday commentary.

Real interest rates in the bond market have spiked in recent weeks, likely on concerns about the deficit that could be widened further by a Republican fiscal agenda, making the case for interest rate cuts even as price and employment data comes in hotter than expected.

Trump's economic agenda, which could include import taxes that businesses could then pass on to consumers, may also have an inflationary effect, further reducing the need for cuts.

"Government policy adds uncertainty, which is reflected in bond market agitation. The Fed has to balance whether government spending restrictions might negatively affect growth, against how much any trade taxes will increase US inflation (specifically, whether US consumers will face second round inflation effects from tariffs)," Donovan said.

Some Fed officials have doubled down on cutting rates despite the bank's improved assessment for 2025 economic performance.

"I believe that inflation will continue to make progress toward our 2 percent goal over the medium term and that further [interest rate] reductions will be appropriate," Fed governor Christopher Waller said earlier this month.

The U.S. money supply is approaching the high-point reached in 2022 before the Fed started cutting interest rates and selling securities in order to tighten economic conditions.

After rising by 3.1 percent in the fourth quarter and 3 percent in the third quarter, first-quarter 2025 gross domestic product (GDP) is expected to clock in at 2.3-percent growth, according to the Atlanta Fed. The Fed is expecting 2.1-percent aggregate growth for this year.