Fed Holds Steady on Interest Rates, Cautiously Eyes Inflation
The Federal Reserve has opted to maintain its benchmark interest rate, marking a shift towards a more cautious approach as it assesses the trajectory of inflation and potential policy changes under President Donald Trump.
Job Market Remains Solid, Inflation a Concern
In a statement, the Fed described the job market as “solid,” with the unemployment rate stabilizing at a low level in recent months. However, the central bank expressed concerns over inflation, which “remains somewhat elevated.” This combination typically suggests fewer rate cuts in the coming months.
Powell Deflects Trump’s Comments
During a news conference, Fed Chair Jerome Powell sidestepped questions about President Trump’s recent comments, including his desire for lower oil prices and interest rates. Powell emphasized that the Fed is waiting to see which policies are enacted before making any assessments.
Economic Growth and Uncertainty
The economy is largely healthy, with an unemployment rate of 4.1% and growth exceeding 3% in the fall. However, Powell noted that the Fed doesn’t need to rush to adjust its policy stance. The central bank is taking a wait-and-see approach, awaiting clarity on the implications of Trump’s proposed policies, including tariffs, immigration, tax cuts, and deregulation.
Rate Cuts Unlikely in Near Future
Kathy Bostjancic, chief economist at Nationwide Financial, believes the Fed won’t cut rates again until mid-year. The Fed reduced its rate last year to 4.3% from 5.3%, but hiring has rebounded, and the unemployment rate has declined.
Inflation Uncertainty
Powell has expressed difficulty in gauging inflation’s direction due to uncertainty around Trump’s policies. Higher tariffs and tax cuts could push inflation up, while deregulation could reduce it. The Fed typically keeps interest rates high to slow borrowing and spending and cool inflation.
Global Central Banks Diverge
While the Fed is holding steady, most other central banks in developed countries are cutting their interest rates. The European Central Bank is expected to reduce borrowing costs, and the Bank of Canada has already done so. The Bank of Japan, however, is raising its rate from a rock-bottom level.
Impact on Households and Businesses
American households and businesses are unlikely to see relief from high borrowing costs anytime soon. The average rate on a 30-year mortgage remains above 7%, and the costs of borrowing money have stayed high despite the Fed’s rate reduction.
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