In a pivotal shift, the Federal Reserve is poised to halt its streak of interest rate cuts as officials grapple with a steady economy and persistent inflation risks.
At its December meeting, Fed Chair Jerome H. Powell emphasized the need for a cautious approach, signaling a “new phase” in monetary policy where further rate reductions will be assessed carefully.
This decision marks the first pause since the central bank began easing borrowing costs in September. The move highlights the Fed’s confidence in the resilience of the US economy, despite looming concerns such as inflationary pressures and potential economic upheaval from President Donald Trump’s recently resumed administration.
With interest rates currently set between 4.25% and 4.5%, the Fed’s decision comes amid signs that inflation may not be retreating as swiftly as desired. Core inflation data, which excludes food and fuel prices, suggests that underlying inflation is decelerating, but overall price pressures remain a concern. December saw a Consumer Price Index increase of 2.9% compared to the previous year—the third consecutive month of acceleration.
Labor market strength has added to the Fed’s cautious stance. Despite prior concerns that high borrowing costs might curtail job growth, businesses have shown renewed vigor, keeping employment figures strong.
“There is no compelling reason to cut further at this point,” said Loretta Mester, former president of the Cleveland Fed.
Other policymakers have echoed this sentiment, underscoring the need for clear evidence that inflation is consistently declining.
Investors on Wall Street are bracing for potential volatility, keeping their portfolios defensive in response to uncertainty around monetary policy and the Trump administration’s fiscal agenda. Bond yields have risen, with the 10-year Treasury yield reaching a 14-month high, reflecting shifting expectations for interest rates.
President Trump’s return to office has fueled speculation about economic policy changes, including tariffs on major trade partners and large-scale immigration crackdowns, both of which analysts warn could trigger inflation spikes. Trump’s comments at the World Economic Forum in Davos further pressured the Fed, as he called for immediate interest rate cuts to counteract the effects of his economic policies.
Economists remain divided on how Trump’s agenda will impact inflation and growth. Some anticipate that tariffs and stricter immigration policies could reignite price increases, prompting the Fed to maintain its pause on rate cuts throughout the year.
As the Fed meeting approaches, investors are keenly focused on Powell’s tone regarding inflation and economic risks. Market analysts predict that Powell will maintain a cautious and non-committal stance. Traders expect the Fed to lower rates twice this year but believe cuts will only come if clear evidence emerges that inflation is on a downward trajectory.
Given the high level of uncertainty surrounding fiscal and economic developments, some investment firms are adopting neutral positions on Treasury bonds.
“It’s a good time to be cautious in the market right now because the uncertainty level is extremely high,” said Guneet Dhingra, head of US rates strategy at BNP Paribas.
The New York Times, Reuters, and Bloomberg contributed to this report.
