Fed pauses rate cuts

As expected, the Federal Reserve took a break from interest rate hikes today, leaving the target range for the federal funds rate at 4.25%-4.50%.

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Bernd Weidensteiner, Dr Christoph Balz

Commerzbank Economic Research

01/29/2025

However, according to Fed Chairman Powell, rates could be cut again if inflation continues to fall. Powell did not convey, however, that the Fed is in a hurry to do so.

Fed pauses interest rate cuts...

At today's meeting, the Fed decided to leave the target range for the federal funds rate unchanged at 4.25%-4.50%. This is the expected pause after three consecutive interest rate cuts. Today's decision was unanimous.

The Fed has a more positive impression of the labor market than at the last meeting. According to the statement, the unemployment rate has stabilized at a low level in recent months (the last statement referred to an increase), and conditions in the labor market remain solid. The strong job data at the end of 2024 are presumably behind this. Furthermore, the central bank no longer points out that inflation has “made progress” towards the inflation target. Neither the employment mandate nor inflation thus provided any arguments for lowering interest rates, unlike at the last meeting.

... and indicates longer wait

In the press conference following the meeting, Fed Chairman Powell made it clear that the Fed is in no hurry to change key rates. Powell basically sees the employment part of the Fed's mandate as fulfilled, saying that the labor market is in balance and not a source of major inflationary pressure. While inflation remains above the Fed's 2% target, Powell pointed to the latest inflation figures as moving in the right direction (although this is not yet reflected in the year-on-year change in inflation, see chart). Even though he appeared more confident about inflation because he views monetary policy as restrictive (i.e. as dampening the economy and inflation), he still wants to see progress in the figures. Another reason for caution is that it is not yet clear how and to what extent the new administration's policies will affect the economy.

It is difficult to estimate how long the interest rate pause will last. When asked whether an interest rate cut in March was still on the table, Powell replied that the Fed is in no hurry to adjust its policy stance. After all, the Fed is assuming that further progress on inflation will be slow. Our forecast of an interest rate cut as early as March has become much less certain.

Powell made it clear that the question for the Fed is whether to ease further or to maintain the current policy stance. There was no mention whatsoever of rate hikes, which have been discussed by some market participants. He also explained that inflation would not necessarily have to fall to the 2% target before the Fed cut interest rates again.

Powell rejected questions about the exact implementation of President Trump's executive orders at the Fed, which, for example, instruct a rollback of diversity measures. Powell also refused to comment on statements by “elected politicians”, which apparently includes President Trump. He reiterated that the Fed bases its monetary policy decisions solely on economic data.

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