Federal Reserve Leaves Rates Unchanged, Warns of Inflationary Headwinds

WASHINGTON — After cutting its benchmark rate by a full percentage point in late 2024, the Federal Reserve held steady at its first meeting of 2025. The federal funds rate stayed in the 4.25%–4.50% range, and the central bank’s statement removed earlier language about being “confident” that inflation was moving sustainably toward its 2% target.

The decision was widely expected, but the tone of Chair Jerome Powell’s press conference was more cautious than many investors had anticipated. Powell noted that the labour market remains “solid by any historical standard,” with unemployment holding near 4.1% and job gains averaging more than 150,000 a month. GDP growth, he added, was running at a healthy pace through the end of 2024. The problem, he said, was that inflation has plateaued.

The Fed’s preferred measure, the personal consumption expenditures price index, registered 2.6% year-over-year in December 2024. Core PCE, which strips out food and energy and is watched closely by policymakers, was 2.8%. Both figures were virtually unchanged from the previous several months, suggesting the “last mile” of disinflation is proving stubborn.

Adding to the uncertainty are the policies coming from the new Trump administration. Trump’s proposed tariffs on Mexico, Canada, and China, his moves to restrict immigration, and his tax cut plans all have the potential to push prices higher. Powell refused to comment directly on the administration’s economic agenda, saying the Fed would wait to see what is enacted into law and then model the effects. But he acknowledged that “some” members of the rate-setting Federal Open Market Committee had begun to incorporate preliminary assumptions about trade policy into their forecasts.

Markets reacted by pushing back expectations for the next rate cut. Where traders had earlier priced in a reduction by March, futures contracts now pointed to June or even July at the earliest. The S&P 500 slipped modestly during Powell’s remarks, while yields on two-year Treasury notes edged higher.

For American households, the plateau in rates means continued high borrowing costs. Mortgage rates, which briefly dipped below 6% in late 2024 on hopes of further cuts, rebounded above 6.5% in January. Credit card interest rates remained near record highs above 20%. Auto loans also stayed expensive.

The Fed’s next move will depend heavily on the inflation data over the next few months and the speed with which the new administration’s policies translate into actual price pressures. Powell’s message was simple: for now, wait and see.