The Fed Takes a Wait-and-See Approach

Key Takeaways

• As expected, the Federal Reserve’s Federal Open Market Committee (FOMC) at its first meeting for 2025 kept the federal funds target rate range at 4.25% to 4.50%.
• This week’s hold stance by the FOMC after three straight cuts was expected by the market with the Fed wanting more clarity on the economy before cutting rates further.
• The FOMC statement had one telling change from last month, dropping language indicating inflation “had made progress” toward the Fed’s 2% goal.

At their January meeting, the Federal Open Market Committee (FOMC) saw all 12 voting members agree to hold the fed funds rate range at 4.25% to 4.50%. This hold stance had been priced in by the market, as the year started with an over 90% chance the committee would not cut rates at the meeting.

The base-case projection by many institutions is for the FOMC to cut rates just once this year (the chances for a rate cut in March stand at only 18% but rise to 50% for June). With core PCE (Personal Consumption Expenditures Price Index) inflation expected to rise in the second half of 2025 amid increased import tariffs and tighter immigration restrictions, investors may have to lower hopes of falling interest rates lifting risk assets. The Fed will likely take its time when deciding whether to reduce the benchmark rate in 2025, which may put the focus on 2026 as the year rate cuts resume.  The pause at this week’s meeting—and likely the next meeting—could be seen as the committee awaits more clarity about the new Trump administration policies and their impact on the economy. 

On the economic effect of any new tariffs on the economy, Chair Powell said at his press conference, “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.”

The FOMC likely sees no urgency to further cut rates given the continued strength in economic activity, personal consumption, the labor market, and the limited progress on the inflation front in recent months. In addition, the Fed will pay close attention to the recent increase in household inflation expectations, with the University of Michigan's measure of longer-run inflation expectations reverting this month to 3.2%, which is at the top of the range for the past few years. Stubborn inflation has appeared to leave committee members concerned that elevated inflation expectations—along with upside risks to inflation due to potential tariff increases and tighter restrictions on immigration—could endanger the return of core and headline PCE inflation to the 2.5% median projection for 2025.

The Fed’s first statement of the year saw only one significant change from December, dropping inflation “has made progress” toward the central bank’s 2% objective. Deleting the cautiously optimistic language about lower inflation reflects the central bank’s concern about the return of rising prices.

After the Fed announcement, the 10-year Treasury ended the day flat and finished at 4.55%, while both short and long rates were higher for the day. The Dow Jones Industrial Average and S&P 500 Index returned -0.31% and -0.47%, respectively, for the day.

10-Year Treasury Yield over the Past 12 Months

In Conclusion

The wait-and-see stance at the first FOMC meeting of 2025 did not surprise investors, especially given the unknown details and economic impacts of new Trump administration policies. Still, the Fed remained optimistic about the overall picture for the U.S. economy, the unemployment rate, and personal spending. While inflation expectations have been adjusted a bit on the short end, this has not impacted the long end. All this has given the Fed the confidence to take a beat or two before resuming rate cuts. Though markets remain somewhat impatient—equity markets pulled back during Chair Powell’s press conference—FOMC remained stoic in its overall message that the “extent and timing of additional adjustments to the target range” will depend on the committee's careful assessment of “incoming data, the evolving outlook, and the balance of risks.” With no rate cut expected by the markets at the next meeting, we will also have to take a wait-and-see approach to how actions by the Trump administration will impact the economy and shape the FOMC’s viewpoint on future interest-rate cuts.

Definitions

One basis point is equal to 0.01%.

The Core Personal Consumption Expenditure (PCE) Price Index provides a measure of the prices paid by people for domestic purchases of goods and services, excluding the prices of food and energy. The core PCE is the Fed’s preferred inflation measure.

The Dow Jones Industrial Average index (DJIA) tracks the share price of the top 30 large, publicly-owned U.S. companies which is often used as an indicator of the overall condition of the U.S. stock market.

The federal funds rate is the target interest rate set by the Fed at which commercial banks borrow and lend their extra reserves to one another overnight.

The S&P 500 Index is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the U.S. stock market.

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