The Federal Reserve left interest rates unchanged on Wednesday, as the central bank turned cautious on further cuts amid a sturdy economy and uncertainty about inflation.
The central bank’s decision to pause at its first meeting of 2025 followed a series of cuts that began in September to account for progress already made on getting inflation down.
Over the course of three meetings, the Fed lowered rates by a full percentage point to a range of 4.25 percent to 4.5 percent, which was maintained on Wednesday.
In a statement released alongside the decision, the Fed described the labor market as “solid,” noting that the unemployment rate had “stabilized at a low level.”
Inflation concerns continued to dominate, however, with the Fed scrapping earlier guidance about the progress made in achieving the central bank’s 2 percent inflation goal. Rather, it said that inflation remained “somewhat elevated.”
Officials at the Fed are trying to strike the right balance between ensuring that high inflation is fully vanquished after the worst shock in decades while also safeguarding the labor market from weakening excessively. Lowering interest rates too slowly risks jeopardizing jobs, whereas lowering interest rates too quickly risks inflation getting stuck above the Fed’s 2 percent goal.
Angst about the labor market that emerged over the summer has abated as businesses continue to hire and layoffs remain low. But progress on taming price pressures has been bumpy in recent months. The concern is that it may get even bumpier given President Trump’s plans to dramatically reshape economic policy in his second term in the White House, including through a much more liberal use of tariffs and mass deportations.
What is unclear is how those policies will affect inflation and growth and in turn when and by how much the Fed will be able to lower interest rates again.
In December, officials scaled back their forecasts for rate cuts for this year to just a half a percentage point — half of what they estimated in September — as they sharply raised their inflation projections for the year. That reflected potential policy changes from Mr. Trump for some officials, Fed Chair Jerome H. Powell said at the time, while others revised their outlooks based on the state of the economy alone.
Key to how the Fed will respond to price pressures caused by tariffs, for example, is how expectations from consumers and businesses about future inflation shift as a result. The central bank proved to be more concerned about the potential hit to growth caused by trade tensions during Mr. Trump’s first term — so much so that it lowered interest rates — but that was because inflation was consistently below not above its goal as it is today.
Mr. Trump’s top economic advisers, including newly confirmed Treasury Secretary Scott Bessent, have pushed back on the idea that tariffs will cause higher consumer prices on the grounds that increased costs to U.S. importers would in part be offset by a stronger dollar. Mr. Bessent also expects foreign manufacturers to slash prices in order to stay competitive with U.S. firms, which would further insulate consumers.
Mr. Trump has made squashing inflation a central pillar of his economic agenda, and said last week that as his policies lower oil prices, he would “demand that interest rates drop immediately.”
Mr. Trump repeatedly attacked Mr. Powell during his first term for failing to lower interest rates fast enough. At one point, he questioned if the Fed chair was a “bigger enemy” to the U.S. than China’s president Xi Jinping.
Speaking at a New York Times event in December, Mr. Powell said he was “not concerned” about the Fed maintaining its political independence.