The Federal Reserve said Wednesday that it is leaving its benchmark interest rate unchanged, marking the central bank’s first pause after three consecutive rate cuts last year.
The Fed maintained its federal funds rate — what banks charge each other for short-term loans — in its current range of 3.5% to 3.75%. The decision matched expectations from Wall Street economists, according to financial data service FactSet.
The central bank is grappling with two potentially troubling economic trends: A softer labor market and an inflation rate that remains well above the central bank’s annual target of 2%. At the same time, the U.S. economy continues to expand at a fast pace, with the country’s third-quarter growth rising at a 4.4% annual rate, far outpacing economist forecasts.
“The Fed is likely on an extended pause with strong activity data and signs of stabilization in the labor market suggesting little need to take out further insurance,” said Kay Haigh, global co-head of fixed income and liquidity solutions at Goldman Sachs Asset Management, in an email after the announcement.
“Solid” economic growth
In its Wednesday statement, the Federal Reserve cited a “solid pace” of economic activity and an unemployment rate that remains low. It noted that inflation “remains somewhat elevated.” Prices rose at a 2.7% annual pace in December, according to the latest Consumer Price Index.
At a press conference to discuss the decision, Fed Chair Jerome Powell noted that some risks appear to have eased, such as pressures in the labor market, while economic activity is picking up.
There’s “a clear improvement on the outlook for growth,” Powell noted. “It’s overall a stronger forecast, really.”
Asked if the Fed is comfortable maintaining the current benchmark rate, Powell responded, “We think we’re well-positioned after those three cuts [in 2025] to let the data speak to us.”
Pause in cuts?
Some on Wall Street interpreted Powell’s comments and the FOMC’s statement as evidence that the Fed may hold off on cutting for the time being.
“Labor conditions are not worsening, growth has accelerated, and inflation has steadied for now,” said Charlie Ripley, senior investment strategist for Allianz Investment Management, in an email. “To put it in other words, policy rates are much closer to neutral against the current backdrop and it’s time for a long pause.”
The Federal Open Market Committee, the 12-person voting committee that sets the central bank’s rate decisions, wasn’t unanimous in its decision. Ten of the panel’s members, including Fed Chair Jerome Powell, voted to hold the benchmark rate steady, while Stephen Miran and Christopher Waller voted to lower the rate by 0.25 percentage points, the Fed said.
The vote for a cut from Waller, who is one of the candidates to replace Powell as Fed chair when the latter’s term ends in May, “keeps him in the running to be the next chair,” noted Jack McIntyre, portfolio manager at Brandywine Global, in an email.
President Trump, who has pressed the Fed to lower interest rates, has said he will soon name Powell’s successor.
Fed turmoil
The central bank’s latest monetary policy statement comes amid a Department of Justice investigation into Powell linked to his congressional testimony last year about ongoing renovations at several Fed buildings. The Supreme Court is also currently weighing whether to allow Fed Governor Lisa Cook to keep her job after Mr. Trump sought to fire her.
Powell sidestepped most questions about the probe, his potential replacement and whether he’ll stay on at the Fed as a board governor. Asked why he attended the Supreme Court hearing about Cook, which involves issues of the Fed’s independence, Powell said he did so because of the case’s importance.
“That case is perhaps the most important legal case in the Fed’s 113-year history,” Powell said, noting that former Fed Chair Paul Volcker appeared at the Supreme Court in the 1980s. “I thought it might be hard to explain why I didn’t attend.”