Paolo Confino

<ul>
<li>The Federal Reserve did not lower interest rates, after having done so for three consecutive meetings to end 2024. Stocks declined on the news, with the S&amp;P 500 sinking 0.7% from the previous&#8217; day&#8217;s close.</li>
</ul>



The Federal Reserve met for the first time since President Donald Trump was sworn into office for his second term. The meeting went as expected, with no changes to interest rates. But the S&amp;P 500 broad index of large cap stocks declined on the news, sinking 0.7% immediately after the news before rebounding to down 0.5% shortly before market close, roughly where it had been before the Fed&#8217;s announcement.<div class="paywall-selector"></div><div class="paywall">



The Fed’s latest decision infuriated Trump, who has been vocal in wanting to see interest rates come down. A few hours after the Fed announced it would hold rates steady Trump railed against the Fed&#8217;s decision and Powell&#8217;s performance at its helm in a post on his social media platform Truth Social. Trump said he did not have faith in Powell or the Fed because they &#8220;failed to stop the problem they created with inflation.&#8221;



&#8220;If the Fed had spent less time on DEI, gender ideology, &#8216;green&#8217; energy, and fake climate change, Inflation would never have been a problem,&#8221; Trump wrote. &#8220;Instead, we suffered from the worst Inflation in the History of our Country!&#8221;



Over his career, Trump has expressed skepticism about the idea that the Fed should remain independent from political decisions. During a speech at the World Economic Forum in Davos, Switzerland, the president said he’d “demand” that the central bank lower interest rates. He later followed up those comments, adding criticism of Powell. 



“I think I know interest rates much better than they do, and I think I know it certainly much better than the one who’s primarily in charge of making that decision,” Trump <a href="https://www.bloomberg.com/news/articles/2025-01-23/trump-says-he-knows-interest-rates-better-than-fed-chief-powell">told</a> reporters last week.



When asked about Trump&#8217;s statements during his remarks on Wednesday, Powell declined to comment on the grounds that the central bank should remain independent of politics. &#8220;I&#8217;m not going to have any any response or comment whatsoever on what the President said,&#8221; Powell said.



Powell did clarify that he and Trump had had &#8220;no contact&#8221; since the president took office.



In its Wednesday statement, <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20250129a.htm">the Fed said</a>, again, that &#8220;inflation remains somewhat elevated.&#8221; That will be negative news for investors as it might signal that the Fed will be reluctant to make further rate cuts until inflation has eased further.



“If the job of Fed chair came with a monetary policy remote, Powell’s thumb would be hovering over the pause button right now,” Glenmede chief of investment strategy and research Jason Pride wrote ahead of the meeting.&nbsp;



Target rates remain between 4.25% and 4.5% after Wednesday’s meetings. 



The Fed had hinted it would pause rate cuts back in December when it gave the impression that it was satisfied with the current progress in the fight against inflation. It indicated that it wanted to avoid making any hasty decisions that could reverse the hard fought progress thus far. That news sent stocks <a href="https://www.wsj.com/economy/central-banking/fed-cuts-interest-rates-again-but-officials-expect-fewer-reductions-in-2025-70562fac">tumbling</a> in one of the <a href="https://www.reuters.com/markets/us/futures-inch-higher-markets-await-fed-decision-2024-12-18/">worst days</a> for the markets in 2024. 



Today&#8217;s meeting kicked the can down the road on further changes to interest rates. The Fed cited a stabilizing unemployment rate and a solid labor market. The Fed did ever so slightly change its tune on inflation. In its prepared statements on Wednesday released after its two-day policy meeting the Fed called inflation &#8220;somewhat elevated.&#8221; That was a change in language from the previous December meeting in which it had referred to &#8220;progress&#8221; on inflation. The December inflation rate of 2.9% was a slight uptick from November&#8217;s 2.7%. The U.S. economy has struggled to get inflation down to the Fed&#8217;s target level of 2%. During a press conference Powell said that the language change was &#8220;not meant to send a signal other than that we remain committed to achieving our 2% inflation goal sustainably.&#8221;



Investors generally seemed to interpret them as such. &#8220;At first glance, the shift looks somewhat hawkish, but they are small shifts when viewed in the context of keeping rates steady,&#8221; Jeffries senior U.S. economist Thomas Simons wrote in an analyst note after the meeting.



The Fed&#8217;s outlook included an expectation that market conditions could remain the same, without tipping its hand one way or the other. It said it was prepared to change monetary policy &#8220;as appropriate&#8221; if risks emerged that could hurt its efforts to lower inflation and keep employment levels high. 



Powell reiterated that the Fed remained flexible. &#8220;We&#8217;re not on any preset course,&#8221; he said.



The Fed had cut rates in its previous three meetings from September to December 2024. Investors expect the Fed to start cutting rates again in June if the current economic data continues to hold. Inflation has come down significantly since the 9% highs in the summer of 2022. Though the current 2.9% rate is still almost a full percentage point above the Fed’s 2% target.&nbsp;



<h2 class="wp-block-heading">Potential Trump administration policy changes loom </h2>



Investors were prepared for the Federal Reserve to take a holding pattern as it surveyed the policy landscape that might result from the new administration. Trump’s team had floated several unorthodox economic policy proposals that could alter the macroeconomic picture, including placing tariffs on trade partners, which could be inflationary. Other possible measures could be disinflationary, like cutting government spending or increasing energy production.&nbsp;



Powell offered no comment on the specifics of any of the newly appointed Trump administration&#8217;s policy proposals, saying it would be &#8220;inappropriate&#8221; for him to do so. 



However, he did say that they had not yet meaningfully changed the Fed&#8217;s outlook for the economy because it was still too early too properly assess their effects. Trump&#8217;s tariffs proposals, which are feared to be inflationary, had not raised long-term forecasts for inflation, Powell told reporters. 



&#8220;The committee is very much in the mode of waiting to see what policies are enacted,&#8221; Powell said. &#8220;We don&#8217;t know what will happen with tariffs, with immigration, with fiscal policy and with regulatory policy. We&#8217;re only just beginning to see—and actually are not really beginning to see much. I think 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.&#8221;



The possible outcomes from policy changes remained too broad, and too uncertain for the Fed to incorporate them into any decision making at this stage. That is especially true for tariffs because the Fed doesn&#8217;t know many of the specifics of the policy such as what goods will be tariffed, how much, for how long, and if those will raise costs for consumers; nor does the Fed yet know how other countries might retaliate against the U.S., Powell said. 



William Blair macro analyst Richard De Chazal estimates that about 40% to 50% of a cost increase gets passed on to the consumer. But that could change if tariffs expand. &#8220;What&#8217;s different today is the greater potential for second-round price impacts, given that Trump is also talking about potential tariff increases beyond those of Canada, Mexico, and China,&#8221; De Chazal wrote in an analyst note following the Fed&#8217;s decision.



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<iframe loading="lazy" title="President Donald Trump addresses the World Economic Forum in Davos — 1/23/2025" width="500" height="281" src="https://www.youtube.com/embed/gCWStMriOAc?feature=oembed" frameborder="0" allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share" referrerpolicy="strict-origin-when-cross-origin" allowfullscreen></iframe>
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The Fed delivered on investor expectations and paused rate cuts for the first time in three meetings.

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