The Federal Reserve left interest rates unchanged on Wednesday, as the central bank turned cautious on further cuts amid a strong economy and uncertainty about inflation.
The central bank’s decision to pause at its first meeting of 2025 followed a series of cuts that began in September to account for progress already made on getting inflation down.
Over the course of three meetings, the Fed lowered rates by a full percentage point to a range of 4.25 percent to 4.5 percent, which was maintained on Wednesday.
Speaking at a news conference on Wednesday, Fed Chair Jerome H. Powell signaled that he was open to additional cuts at some point but was clear that “strong” growth and a “solid” labor market meant the central bank could take its time.
Mr. Powell described the Fed’s policy settings as “meaningfully restrictive,” suggesting that interest rates remained at a level that was weighing on growth and aiding its efforts to bring inflation down. He also hinted that the ongoing rise in U.S. government bond yields because of expectations about more buoyant growth and, in turn, inflation, was helping the Fed’s efforts to quell inflation and dampen spending.
Still, the bar for additional cuts appears high. Mr. Powell said that he would need to see “real progress on inflation or some weakness in the labor market before we consider making adjustments.”
“The broad sense of the committee is that we don’t need to be in a hurry to adjust our policy stance,” he said.
Officials at the Fed are trying to strike the right balance between ensuring that high inflation is fully vanquished after the worst shock in decades while also safeguarding the labor market from weakening excessively. Lowering interest rates too slowly risks jeopardizing jobs, whereas lowering interest rates too quickly risks inflation getting stuck above the Fed’s 2 percent goal. Mr. Powell on Wednesday said those risks still appeared to be in balance.
Angst about the labor market that emerged over the summer has abated as businesses continue to hire and layoffs remain low. But progress on taming price pressures has been bumpy in recent months. The concern is that it may get even bumpier given President Trump’s plans to dramatically reshape economic policy in his second term in the White House, including through a much more liberal use of tariffs and mass deportations.
What is unclear is how those policies will affect inflation and growth and, in turn, when and by how much the Fed will be able to lower interest rates again. Mr. Powell was careful not to comment directly about Mr. Trump or the potential economic impact of his policies, despite facing repeated questions.
“We need to let those policies be articulated before we can even begin to make a plausible assessment of what their implications for the economy will be,” he said when asked about tariffs.
He did acknowledge, however, that uncertainty about tariffs risked causing businesses to retrench and pull back on investment, as was the case during Mr. Trump’s first administration when trade tensions flared. Mr. Trump has said he will impose 25 percent tariffs on Canada and Mexico on Feb. 1, along with 10 percent tariffs on China, unless those countries do more to stop the flow of migrants and drugs into the United States.
Still, he repeatedly avoided answering any questions about Mr. Trump or his policies, including the president’s desire for lower interest rates. “I’m not going to have any response or comment whatsoever on what the president said,” he said.
Mr. Trump did not hold back on responding to the Fed’s decision to pause, blasting Mr. Powell and the Fed on social media.
“Because Jay Powell and the Fed failed to stop the problem they created with Inflation, I will do it by unleashing American Energy production, slashing Regulation, rebalancing International Trade, and reigniting American Manufacturing,” Mr. Trump wrote on Truth Social. “If the Fed had spent less time on DEI, gender ideology, ‘green’ energy, and fake climate change, Inflation would never have been a problem. Instead, we suffered from the worst Inflation in the History of our Country!”
Inflation remains the foremost concern for the Fed, despite better-than-expected data last month that suggested underlying prices pressures were coming under control.
In December, officials scaled back their forecasts for rate cuts for this year to just a half a percentage point — half of what they estimated in September — as they sharply raised their inflation projections for the year. That reflected potential policy changes by Mr. Trump that some officials incorporated into their outlooks, Mr. Powell said at the time. Others revised their outlooks based on the state of the economy alone.
Key to how the Fed will respond to any price pressures caused by tariffs is how expectations from consumers and businesses about future inflation shift as a result. The central bank proved to be more concerned about the potential hit to growth caused by trade tensions during Mr. Trump’s first term — so much so that it lowered interest rates to ward off weakness — but that was because inflation was consistently below the Fed’s goal, which is a different scenario than what exists today.
Mr. Powell on Wednesday sought to allay concerns that consumers and households were becoming more concerned about inflation following a recent rise in expectations of future inflation by some metrics.
“You see expectations moving up a little bit at the short-end but not at the long-end, where it really matters,” he said.
Mr. Trump’s top economic advisers, including newly confirmed Treasury Secretary Scott Bessent, have pushed back on the idea that tariffs will cause higher consumer prices on the grounds that increased costs to U.S. importers would in part be offset by a stronger dollar. Mr. Bessent also expects foreign manufacturers to slash prices in order to stay competitive with U.S. firms, which would further insulate consumers.
Mr. Trump has made squashing inflation a central pillar of his economic agenda, and said last week that as his policies lower oil prices, he would “demand that interest rates drop immediately.”
Mr. Trump repeatedly attacked Mr. Powell during his first term for failing to lower interest rates fast enough. At one point, he questioned if the Fed chair was a “bigger enemy” to the U.S. than China’s president Xi Jinping.
Speaking at a New York Times event in December, Mr. Powell said he was “not concerned” about the Fed maintaining its political independence.
“Don’t look for us to do anything else,” Mr. Powell said on Wednesday when pressed if the Fed would continue to operate independent of politics.