Fed Keeps Interest Rates Steady Setting Up Potential Clash with President Trump

What Happened?

The Federal Reserve announced it is keeping interest rates steady after three consecutive cuts since 2024.

Along with the interest rate announcement the Fed issued a policy statement which included the following assessment:

‘Recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated.’

The decision reached by the Fed was unanimous.

Why it Matters

Because of the Fed’s decision, interest rates will remain in the range of 4.25 to 4.5 percent, which is a point lower than last year’s peak rate. The Fed’s decision comes after a December 2024 projection that it had planned to cut interest rates twice in 2025, which it could still do. 

President Trump said he will demand that interest rates be lowered, though he did not specify how much or when he would issue such a demand.

Jerome Powell, head of the Federal Reserve, said ‘I’m not going to have any response or comment whatsoever on what the president said. It’s not appropriate for me to do so.’

Some of the Fed’s uncertainty stems from the large number of policy actions President Trump has taken in his first week in office, since the full impact of those new measures has yet to be seen.

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

The hold on interest rates follows a more aggressive rate cut in December that had an immediate effect on the market.

Deutsche Bank analyst Henry Allen reported ‘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.’

Wording changes in the Fed’s policy statements can often convey deeper messages. Many observers noted in this most recent announcement the Fed removed language about achieving a two percent inflation goal and instead simply stated that ‘inflation remains elevated.’

How it Affects You

Whether trade tensions or potential new tariffs might increase price pressures remains to be seen, but the Fed’s actions indicate they think it could.

Scott Bessett, the new Secretary of the Treasury, has challenged the idea that new tariffs would lead to higher costs for consumers by arguing that those costs would be offset by a stronger dollar.

When asked why the two percent inflation target is not on the table, Mr. Powell said ‘its not a good thing to revisit when it hasn’t been achieved.’

For now it appears the Fed is waiting for more solid indications that inflation is cooling and to see how the new Trump Administration’s policies impact the market.