Federal Reserve Chair Jerome Powell announced that the US central bank will be keeping its interest rates unchanged for now, citing inflation levels which fall above Fed’s 2 per cent target and a solid job market.
Speaking before the Senate Banking Committee on the first of a two-day testimony, Powell hinted that the central bank would maintain its current policy stance, having already cut rates by a full percentage point in late 2024.
“With the economy remaining strong, we do not need to be in a hurry to adjust our policy stance,” he said.
His comments come at a time when the Trump administration is introducing sweeping policy changes, including tariffs on steel and aluminium and significant reductions in government spending.
Future of interest rate cuts remains uncertain
The Fed is also conducting a second review of its policy strategies and communication tools, though Powell insisted this would not include changing the bank’s inflation target, despite calls from some economists to raise it.
After the Fed’s last review in 2019, it shifted to an average inflation target of 2 per cent, which analysts argue resulted in its slow response to rising prices in 2021 and 2022. The central bank only began raising rates in March 2022 to curb inflation by making borrowing more expensive.
At its December meeting, the Fed projected two rate cuts in 2025, thought the market analysts are now less confident. Morgan Stanley revised their forecast to just one rate cut next year, while futures markets suggested a single cut in July.
Fewer reductions would mean continued high borrowing costs for mortgages, credit cards, and auto loans, though mortgage rates are also influenced by movements in US Treasury yields.
Fed Governor Adriana Kugler had earlier said that the labour market was “stable,” allowing policymakers more time to assess their next move.
She also acknowledged that Trump’s proposed economic policies, including tariffs and immigration restrictions, could result in new inflationary pressures. Some economists warn of mass deportations that could shrink the labour force and drive wages higher, fuelling inflation.
Others argue that Trump’s deregulation agenda might boost supply and lower prices.
“The cautious and the prudent step is to hold the (Fed’s key) rate where it is for some time,” Kugler said.
Strong job growth suggested less urgency for the Fed to cut rates, a stark contrast to last September, when weak hiring prompted a steep half-point rate reduction amid recession fears.
“The latest data bolsters our confidence that the Fed cutting cycle is over,” economists at Bank of America wrote in a note on Friday.
