Cautious Fed Holds Steady Amid Trump Unknowns

The Federal Reserve (Fed) is set to keep interest rates unchanged at its January 29 meeting, as uncertainty surrounding President Donald Trump's policies looms over the economic outlook. The Fed's decision to maintain the federal funds rate at its current range of 4.25% to 4.5% comes after a series of rate cuts in 2024 that pushed down the rate by a full percentage point. The Fed's cautious approach reflects the persistence of inflation above its 2% target and the need to assess the potential impact of Trump's policies on the economy.

The Fed's decision to pause rate cuts is in line with market expectations, with over 90% of economists polled by FactSet anticipating no change in the benchmark rate. The Fed's projections from December 2024 show that inflation, as measured by the PCE inflation rate, is expected to remain somewhat elevated at 2.5% in 2025, before declining to 2.1% in 2026 and 2.0% in 2027. The Fed's longer-run projection for inflation is 2.0%.

The Fed's projections for real GDP growth show a decline from 2.5% in 2024 to 2.1% in 2025, 2.0% in 2026, and 1.9% in 2027. The unemployment rate is projected to remain relatively low, at 4.3% in 2025, 4.3% in 2026, and 4.3% in 2027. The Fed's longer-run projection for the unemployment rate is 4.2%.

The Fed's cautious approach to interest rates reflects the uncertainty surrounding Trump's policies, particularly his plans for tariffs and mass deportations. These policies could have inflationary effects, potentially offsetting the Fed's efforts to bring inflation down to its 2% target. The Fed will continue to monitor the implications of incoming information for the economic outlook, taking into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

The Fed's decision to maintain interest rates at their current level balances the need to control inflation with the potential risks of a slowing economy. By keeping rates steady, the Fed allows the economy to continue to grow while also controlling inflation. This balance is necessary to achieve the Fed's dual mandate of maximum employment and price stability.

In conclusion, the Fed's cautious approach to interest rates reflects the persistence of inflation above its target and the uncertainty surrounding Trump's policies. The Fed will continue to monitor key economic indicators and assess the potential impact of Trump's policies on the economy, adjusting its policy as needed to maintain its dual mandate.