The Federal Reserve left interest rates unchanged after its January policy meeting, dashing hopes for an imminent rate cut despite mounting pressure from Wall Street and the White House.
Fed Holds Steady, But Doesn’t Rule Out Future Cuts
The Fed’s benchmark interest rate will remain at 4.75%-5.00% for now, the central bank said in its policy statement on Wednesday. While acknowledging that inflation has moderated, Fed Chair Jerome Powell said the central bank needs to see a “continuation of good inflation data” before changing course.
“We will need substantially more evidence to be confident inflation is on a long, downward path,” Powell said in a press conference after the decision.
The Fed slashed rates dramatically in 2023 to fight surging inflation, but began raising them again last spring as price pressures eased. Markets had priced in a quarter-point rate cut in March, but Powell pushed back on those expectations while leaving the door open to cuts later this year if the data warrants it.
Pressure Builds From Wall Street and White House
The Fed has faced growing calls in recent weeks to cut rates and stave off a potential recession. Wall Street banks have forecast weakness ahead, with firms like JPMorgan and Morgan Stanley predicting rate cuts in the second or third quarter.
The White House has also lobbied for looser monetary policy to boost President Biden’s economic track record ahead of next year’s election. Cutting rates could spur more investment and hiring, though Powell has resisted what he calls political “short-termism.”
Inflation Moderates but Remains Elevated
The Fed’s hawkish stance comes despite clear evidence that inflationary pressures have eased substantially from their peak last year.
| Category | Year-Over-Year Change |
|---|---|
| Overall Inflation | 5.0% |
| Food and Energy | 3.2% |
| Core Inflation | 4.4% |
After hitting a 40-year high of 9.1% in June, inflation by the Fed’s preferred measure has cooled to 5% as of December. Investors took the latest Consumer Price Index report as evidence the Fed’s rate hikes are working.
“The disinflationary process has started and is expected to continue this year,” said Mohamed El-Erian, chief economic advisor at Allianz.
The Path Ahead: No Cuts Yet, But Data Dependent
Markets plunged after Powell dismissed imminent rate cuts, indicating traders may need to temper expectations of Fed easing in the near term. U.S. stocks fell over 2% while yields on government bonds shot higher.
Still, the Fed maintains it will alter policy if economic conditions change. Cooling demand could slow inflation further in coming months, paving the way for rate cuts later this year.
”We’ll get there when we get there,” Powell reiterated, signaling data dependence ahead of upcoming meetings in March, May and beyond.
Looking Ahead
All eyes now turn to Friday’s January jobs report for signs of an economic slowdown that could influence Fed thinking. Nonfarm payrolls likely increased by 185,000 while the jobless rate ticked higher to 3.6%, according to forecasts.
If upcoming data confirms inflation continues to decline, markets will renew calls for the Fed to cut rates and support the record-long expansion. But for now, Powell & Co. remain cautious, intent on keeping prices under control as the economy enters an election year.
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