The Federal Reserve on Wednesday announced it will leave interest rates unchanged, breaking a streak of three straight rate cuts amid uncertainty over the labor market and inflation.
Fed policymakers voted to leave the benchmark federal funds rate unchanged at its current range of 3.5% to 3.75%. The move follows three successive 25 basis point rate cuts in September, October and December to close out last year.
Economic data showing a slowdown in the labor market along with inflation continuing to run hotter than the Fed’s 2% target prompted policymakers to put rate cuts on pause, after they were deeply divided over the decision to cut in December.
The Federal Open Market Committee (FOMC) voted 10-2 in favor of leaving rates unchanged, with dissents by Fed Governors Stephen Miran and Christopher Waller, who were in favor of 25 basis point cuts.
Miran has been supportive of deeper cuts than the FOMC has favored since he joined the board while taking leave from his role in the Trump administration. His term at the Fed is set to expire on Saturday. Waller is viewed as a potential nominee for Fed chair and last dissented from an FOMC decision in July, when the Fed held rates steady.
The FOMC’s statement noted that data shows the economy “expanding at a solid pace,” adding that, “Job gains have remained low, and the unemployment rate has shown some signs of stabilization. Inflation remains somewhat elevated.”
Federal Reserve Chair Jerome Powell said at a press conference that after policymakers lowered rates by 25 basis points at each of the prior three meetings, they “see the current stance of monetary policy as appropriate to promote progress toward both our maximum employment and 2% inflation goals.”
Powell noted that the labor market has shown signs of stabilizing as the last three jobs reports showed average declines of 22,000 jobs per month, though the private sector added 29,000 jobs per month in that period. He added the slower growth in the labor supply was due to lower levels of immigration and labor force participation as well as softening demand for labor.
The Fed chair also said that inflation remains elevated, with the personal consumption expenditures (PCE) index up 2.9% over the past year through December. He explained that “elevated readings largely reflect inflation in the goods sector, which has been boosted by the effects of tariffs,” while in contrast, the services sector has seen disinflation.
Powell was asked about how close the Fed’s current interest rate policy is at or near neutral, and he said that “it’s hard to look at the incoming data and say that policy’s significantly restrictive at this time,” saying that it may be “loosely neutral or somewhat restrictive, you know, it’s in the eye of the beholder.”
He added that after cutting 175 basis points at the end of 2024 and 2025, the central bank is well-positioned to “let the data speak to us” as they weigh potential interest rate moves at future meetings.
The chairman was asked by FOX Business’ Edward Lawrence whether the effects of tariffs have moved through the economy in terms of price increases, and Powell said that “a lot of it has” based on elevated goods prices.
“Most of the overrun in goods prices is from tariffs, and that’s actually good news, because if it weren’t from tariffs it might mean it’s from demand, and that’s a hard problem to solve. We do think tariffs are likely to move through and be a one-time price increase,” Powell said.
“The expectation is that we will see the effects of tariffs flowing through goods prices peaking and then starting to come down, assuming there are no new major tariff increases that are begun, and that’s what we expect to see over the course of this year,” Powell said.
This is a developing story. Please check back for updates.
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