– FOMC Signals No Hurry To Resume Easing with Unemployment ‘Stabilizing’
– Powell: Fed ‘Well-Positioned’ To See how ‘Solid’ Economy, Jobs, Inflation Unfold
By Steven K. Beckner
(MaceNews) – The Federal Reserve declined Wednesday to lower interest rates further in its first monetary policy meeting of the year, despite enormous pressure to do so from President Trump.
Fed Chairman Jerome Powell and his colleagues on the Fed’s policymaking Federal Open Market Committee did allow for potential future rate cuts, but gave no sense they are in any hurry to ease credit again at a time when the economy seems to be humming while inflation remains above target.
The FOMC left the key federal funds rate in a target range of 3.5% to 3.75%, where that policy rate has been since a 25 basis point reduction on Dec. 10.
Looking ahead in its policy statement, the FOMC seemingly kept the door open to eventual rate cuts by reiterating language about “the extent and timing of additional adjustments to the target range for the federal funds rate.”
However, significantly, the new statement contains more upbeat language on the economy and labor markets which would seem to lessen the odds of additional rate cuts. An observation about increased “downside risks” to employment was deleted.
Powell, in a post-FOMC press conference, reinforced the message that rates will be kept where they are for the foreseeable future by pointing to the “solid” state of the economy, better labor market prospects and to the considerable easing the Fed has already done and by saying the Fed is “well-positioned” to wait and see how the economy unfolds.
He also suggested it is too soon for the Fed to declare victory over inflation, which he said grew at an estimated 3.0% on a core basis last year, although he was hopeful that the “one-time” impact of tariff hikes on goods prices should “peak” around mid-year.
Once again, the FOMC vote was split, with Governors Stephen Miran and Christopher Waller dissenting in favor of another 25 basis point rate cut.
At its last meeting on Dec. 10, the FOMC cut the funds rate by 25 basis points for a third straight meeting, bringing the policy rate down to a target range of 3.5% to 3.75% (a median 3.6%). Including the 100 basis points of cuts in the fourth quarter of 2024, the FOMC has cut the funds rate by a total 175 basis points over the past 16 months, as Powell pointed out.
In their December Summary of Economic Projections, the 19 FOMC participants anticipated a single 25 basis point rate cut in 2026, which would leave the funds rate at a median 3.4%, with some projecting more easing, some less. Currently, the funds rate remains 60 basis points above the FOMC’s estimated “longer run” or “neutral” rate.
For now, though, the march toward neutral has halted.
In its first meeting of 2025, the FOMC decided to maintain the funds rate in a 5.5% to 5.75% range and reiterated, “In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.”
The statement’s revised characterization of economic conditions was, perhaps, more notable.
The statement now says “available indicators suggest that economic activity has been expanding at a solid pace.” In contrast the Dec. 10 statement referred to only “moderate” growth. It adds that “job gains have remained low, and the unemployment rate has shown some signs of stabilization,” whereas in December the FOMC statement noted that unemployment had “edged up.”
The FOMC statement’s language on inflation was also changed. Although it repeats that inflation “remains somewhat elevated,” it no longer says that inflation had “moved up.”
Just as importantly, in the paragraph on the balance of risks, the new statement simply says, “The Committee is attentive to the risks to both sides of its dual mandate.” Gone is the Dec. 10 assertion that “downside risks to employment rose in recent months.”
Explaining the rejiggered risk statement, Powell told reporters that FOMC members had determined that “the upside risks to inflation and the downside risks are probably both diminished a bit.” He said “it’s hard to say” whether inflation and employment risks are now “fully in balance,” but added, “we think our policy is in a good place … . We will have to see how the data lead us.”
As he did repeatedly in his Dec. 10 press conference, Powell seemed to suggest that a pause in rate cutting is in effect and will continue for the indefinite future.
“We are well positioned to determine the extent and timing of the policy rate based on incoming date, evolving outlook and risks,” he said in an opening statement.
After noting that the FOMC has cut the funds rate by 175 basis points since September 2024 to “within the range of plausible estimates” of “neutral,” Powell said, “We think we are well positioned here to watch how the economy forms.”
“We are looking at the data,” he continued. “We are not making decisions about future meetings but we do think we are well positioned after the three cuts to let the data speak to us.”
Probed on what might lead the FOMC to resume rate cutting, Powell replied, “We are not trying to articulate a test for when to next cut, or whether to cut at the next meeting. What we are saying is, we are well positioned, as we make decisions meeting by meeting, looking at the incoming data, evolving outlook and all that.”
On several occasions during his press conference, Powell seemed to imply there is no need for further easing at this juncture by making note of the strength of the economy and the apparent “stabilization” of unemployment. He acknowledged there are still some signs of softness in the labor market, but said strong economic growth implies future expansion of employment.
“I think, and many of my colleagues think, it is hard to look at the incoming data and say that policy is significantly restrictive at this time,” he said. “It may be loosely neutral or somewhat restrictive. It is in the eye of the beholder and, of course, no one knows with any precision.”
Although the funds rate nominally remains above the FOMC’s estimated neutral rate, Powell again suggested there is no urgency to move closer to neutral.
Asked whether the FOMC is still committed to bringing the funds rate down to neutral, he responded, “if you look at the SEP from December, most people had additional normalization, but at the same time, we have done a lot of the process of normalizing.”
“A good piece of it is done” he elaborated after again pointing to the 175 basis points of easing done over the past 16 months. “So you have moved a good way, and we think we are well positioned here to watch how the economy performs.”
“We are looking at the data,” he went on. “We are not making decisions about future meetings but we do think we are well positioned after the three cuts to let the data speak to us.”
Powell by no means ruled out further rate cuts if there were to be less inflation and/or more labor market weakness.
“The expectation is that we will see the effects of tariffs flowing through goods prices peaking, then starting to come down, assuming there are no new major tariff increases that are begun, and that is what we expect to see other the course of this year,” he said.
“If we see that, that would be something that tells us that we can loosen policy,” Powell continued. “Also, if we see something that suggests that the labor market is not stabilizing, and, in fact, the downside risks reemerge, or the data just gets worse, we would have to look at both of those…”
Neither did Powell rule out the possibility that the Fed’s next move could be a rate hike, but said that is “not anybody’s base case right now.”
But the Fed chief emphasized the FOMC remains committed to getting inflation down to 2%. Observing that companies “are strongly committed to passing the rest of it through,” he said that is “one of the reasons we need to keep an eye on inflation, and not declare victory, prematurely.”
The FOMC discussions took place against a complex global economic and financial backdrop. While the stock market has been rallying at a record pace, the dollar has fallen to a four-year low, and precious metals have soared to all-time highs in an atmosphere of trade and geopolitical tensions. Economically, job growth has weakened, but GDP has been rising far above trend. Inflation has moderated, but remains well over the Fed’s 2% target.
The meeting also followed an extended Trump administration campaign to extract easier monetary policies. After months of sometimes insulting White House demands for lower interest rates, the Justice Department launched a criminal investigation of Powell’s innovation of Fed headquarters.
Meanwhile, the Supreme Court has been hearing arguments over the president’s effort to fire Gov. Lisa Cook because of alleged mortgage fraud. Powell defended attending a court session.
Trump has been nearing a decision on who he will nominate to replace Powell, whose term as chairman expires in May, but whose term as governor runs until 2028. Last week, Trump sought to discourage Powell from staying on at the Board after his chairmanship expires, warning that if he decides to remain as a regular Fed governor “his life won’t be very, very happy.”
Were Powell to stay, it could fragment an already fractious FOMC and would prevent Trump from filling another Board vacancy. Miran, whom Trump appointed last August to fill a vacancy left by the sudden departure of Gov. Adriana Kugler, is due to return to his post as chairman of the President’s Council of Economic Advisors, at the end of January.
Speculation about Powell’s successor as chairman had centered around Kevin Hassett, director of the White House National Economic Council, but last week Trump said, “I like actually keeping him where he is.” Now, many expect Trump to instead nominate former Fed Governor Kevin Warsh, although other candidates haven’t been ruled out. Lately, BlackRock fixed income chief Rick Rieder has emerged as the front runner in the minds of some.
Last Wednesday, Trump said, “I’d say we’re down to three, but we’re down to two, and I probably can tell you we’re down to maybe one in my mind.”
As it does annually, the FOMC reconsidered its Statement on Longer-Run Goals and Monetary Policy Strategy and voted to reaffirm the amended statement announced last August 22. The amended statement returned the policy framework to the pre-Covid approach, retreating from efforts to maximize employment by allowing the economy to run hot even if it meant above-target inflation for a time.
The statement says: “The maximum level of employment is not directly measurable and changes over time owing largely to non-monetary factors that affect the structure and dynamics of the labor market. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee’s policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments.”
“Price stability is essential for a sound and stable economy and supports the well-being of all Americans. The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee can specify a longer-run goal for inflation. The Committee reaffirms its judgment that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve’s statutory maximum employment and price stability mandates.”