- In December, after the Federal Reserve signaled a more cautious approach to interest rates, the stock market had one of its worst days all year. The central bank has now done as expected—it left interest rates where they were.
The first Federal Reserve meeting of the year has happened, and the central bank has announced its much-awaited policy decision today. Traders in the Federal funds futures market weren’t pricing in a cut. In fact, 99.5% see the Fed leaving its key interest rate unchanged.
The Fed signaled as much at its last meeting in December, when the central bank delivered an interest cut, but hinted that it would take its foot off the gas. Stocks tumbled on the news, and it was one of the worst days of the year for the market.
This time around, pause or not, it doesn’t mean the Fed’s work is done. Borrowing costs are still much higher than what companies and people are used to after an era of cheap money, and it can have an impact on economic activity.
Still, the latest CNBC survey of money managers, strategists, and economists revealed that among its 25 respondents, 65% are banking on two interest rate cuts this year. (Goldman Sachs, for its part, expects the Fed to deliver two 25-basis-point cuts in June and December.) But confidence about how much the Fed will ease its monetary policy is dwindling amid uncertainty surrounding inflation. In comparison, a prior CNBC survey revealed the figure was 78%.
Fed officials released their predictions after their last meeting showing that the median expectation is two cuts in 2025. Just three months earlier, four cuts were expected.
But why are people losing confidence? Well the economy is strong on paper, but we aren’t totally out of the woods where inflation is concerned. Inflation as measured by the Consumer Price Index rose 2.9% in December. Plus, there is a new administration in town.
Before President Donald Trump’s election victory, economists warned that the policies he promised on the campaign trail were inflationary. They were worried about his policies for mass deportation, tariffs, and tax cuts. Since his inauguration, Trump has begun his deportation efforts and threatened countries with tariffs.
All the while, Trump appears to be applying pressure on the Fed and its chair, Jerome Powell. Speaking virtually to the World Economic Forum in Davos, Switzerland, last week, Trump said he would “demand that interest rates drop immediately.”
Hours later speaking from the Oval Office, he said: “I think I know interest rates much better than they do, and I think I know it certainly much better than the one who’s primarily in charge of making that decision.” Trump also said if he disagreed with a decision, he would make it known, and that he thinks Fed officials would listen to him.
In December, the Fed delivered a 25-basis-point rate cut. It was the third reduction since the central bank began lowering borrowing costs in September, and interest rates are now set in a range of 4.25% to 4.5%.
Powell acknowledged inflation had eased but remained elevated relative to the Fed’s 2% target during the press conference. Still, he signaled more caution ahead. “With today’s action, we have lowered our policy rate by a full percentage point from its peak, and our policy stance is now significantly less restrictive,” he said. “We can therefore be more cautious as we consider further adjustments to our policy rate.”
It could be a new phase for the Fed, just as Powell suggested in December.