FOMC Pauses Rate Cuts Amid Uncertainty About Economic, Policy Outlook

– Powell: FOMC ‘In No Hurry’ To Adjust Rates; Policy, Economy ‘In Good Place’

– Powell: Need to See ‘Further Progress’ On Inflation; Watching Labor Market

By Steven K. Beckner

(MaceNews) – After cutting interest rates at three consecutive meetings, the Federal Reserve’s policymaking Federal Open Market Committee kept them unchanged Wednesday and gave no clear indication rate cutting will resume soon.

Fed Chair Jerome Powell declared that the FOMC is “in no hurry” to adjust rates with the economy and monetary policy in “a very good place.”

Meeting in the shadow of a newly inaugurated President Trump who has already started putting pressure on the Fed to lower interest rates as he did in his first term, the FOMC left the door open to a resumption of monetary easing, but gave the impression that the rate pause could continue for a while.

Despite “significant progress” in reducing inflation, Powell said the FOMC will need to see “further progress” in reducing inflation to the Fed’s 2% target, although he said the emergence of unexpected weakness in the labor market could cause the FOMC to ease sooner.

Powell, in his post-FOMC press conference, reiterated that it is appropriate for the FOMC to proceed slowly and cautiously, given that the federal funds rate is “closer to neutral” after 100 basis points of rate cuts in late 2024 and given that inflation remains “elevated.”

At the same time, Powell said he and his colleagues will be paying close attention to labor market conditions, not wanting to see further “cooling” of employment.

The FOMC, in a unanimous vote, left the key federal funds rate in a target range of 4.25% to 4.50% after lowering its policy rate three times from September through December. As usual, it made future rate moves data-dependent.

At their Dec. 18 meeting, when the funds rate was lowered by 25 basis points even as the 2025 inflation forecast was raised, FOMC participants projected 50 basis points of additional rate  reductions in 2025. That was half as much as anticipated in their September Summary of Economic Projections, but still enough to bring the funds rate much closer to the FOMC’s estimated 3% “longer run” or “neutral” rate.

Citing the relative strength of economic activity, faster productivity growth and demand for capital, some Fed officials believe the funds rate is already near neutral, because they think the “real” equilibrium short-term interest rate has risen.

Powell said no one knows precisely where “neutral” lies, but said he believes the 4.3% median funds rate is now “meaningfully above it.”

He called monetary policy “meaningfully restrictive — not highly restrictive but meaningfully restrictive.” And he added, “having cut 100 basis points, it’s appropriate we do not be in a hurry to make further adjustments.”

Since the December meeting a combination of strong economic data and still elevated inflation have led Fed watchers to speculate that the FOMC might do fewer rate cuts this year, and some think it might even have to raise rates at some point.

At the first meeting of 2025 – also the first of the second Trump administration – the Fed’s rate-setting body did indeed desist from continuing to cut rates, but neither the FOMC policy statement nor Powell said anything to confirm talk of an indefinite pause, much less a reversal of rate cuts – only a period of hesitancy.

The resumption of rate cuts will depend heavily on whether there is “further progress” against inflation, Powell made clear.

In the forward guidance portion of its policy statement, the FOMC repeated, “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.”

Interpreting that jargon for reporters in December, Powell explained that the “extent and timing” language means that the FOMC believes “we’re at a point at which it would be appropriate

to slow the pace of rate cuts.”

“So ‘extent,’ that just relates to how, how much further we can reduce our policy rate consistent with getting to a neutral stance,” he continued. “Clearly, that distance has shrunk by 100 basis points. So, it’s significantly smaller, And, again, we’re going to be looking for further progress on inflation, as well as a strong labor market, to make those cuts.”

“’Timing’ just suggests, again, that we’re at a place where we, we, assuming the economy develops as expected, we’re at or near a level that will make it appropriate to slow the pace of adjustments ….,” Powell added.

The only significant change in the policy statement was to the language on the labor market. It now says, “The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid.” By contrast, the December statement said, “Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low.”

The statement again said inflation “remains somewhat elevated.” It removed a previous statement that “inflation has made progress toward the Committee’s 2% objective, but Powell said as much himself.

Powell was peppered with questions about additional monetary easing but was careful not to indicate when or by how much the FOMC might cut rates this year or beyond. Again and again, he conditioned a resumption of rate cuts on evidence of disinflation, although he said a deterioration of labor markets could change the assessment of appropriate policy.

While his remarks could be interpreted as indicating the FOMC might cut rates even less than the 50 basis points projected in December, they were by no means definitive in that regard.

“With our policy stance significantly less restrictive, we do not need to be in a hurry to adjust our policy stance,” Powell declared in an opening statement, adding his usual qualifier that reducing rates “too fast or too much” could hinder the Fed’s inflation fighting strategy while cutting them “too slowly” could unnecessarily weaken the economy and employment.

It was a theme he would repeat in answer to reporters’ questions.

“The way it works is we are looking at the data to guide us what we should do,” he said. “Right now … we’re in a very good place, we’re well-positioned, and the economy is in a very good place.”

“We expect to see further progress on inflation …,” he continued. “As we see that or if we see weakness in the labor market … we may be in a position to make further adjustments.”

But he added, “Right now we are in a very good place for policy. So, we don’t need to be in any hurry to make adjustments.”

Asked if a rate cut will be “on the table” at the FOMC’s March 18-19 meeting, Powell responded in a similar fashion: “The economy is strong; the labor market is solid, downside risks (to employment) have abated, and inflation continues (down) on a slow, bumpy path …. That tells us … we don’t need to be in any hurry to adjust our policy stance.”

Asked about the kind of evidence he and his colleagues will need to see on inflation, Powell was imprecise, but said, “the expectation is we will make further progress … that’s what we want..”

“We want to see continued progress ….,” he went on, adding that the FOMC needs to see inflation data that “build confidence that we’re really making progress…we expect to see that; it’s just a question of when.”

Powell acknowledged two months of encouraging inflation data, which were “consistent with 2% inflation,” but said more is needed.

He insisted the FOMC is committed to its 2% target, and “we do mean to get back to 2%.” The Committee will not be considering changing that target in its ongoing policy framework review, he said.

As he has before, Powell said the FOMC need not wait until inflation goes all the way down to 2% before cutting rates to a “neutral” level.

While saying the FOMC will be watching for any sign of undesired weakness in the labor market, he did not seem particularly concerned.

“The labor market is at a sustainable level …,” he said. “We don’t need it to cool off any more …. We watch those things carefully …, .but overall, the labor market does seem to be pretty stable and broadly in balance.”

Despite rampant speculation about the macroeconomic ramifications of Trump’s threatened tariff increases, Powell continued to avoid drawing premature conclusions about how higher tariffs might affect inflation and in turn monetary policy. Rather, he suggested that, here too, the FOMC will be in no hurry to change policy on the basis of potential tariff changes.

“We’re very much in a mode of waiting to see what polices are enacted,” he said, adding that at this point “we don’t know” what kind of policies will be enacted in the areas of tariffs, or for that matter on regulation, immigration or fiscal policy.

“We need to see policies articulated before we can make decisions ….,” Powell went on. “We will patiently watch and understand and not be in a hurry to… (make a ) policy response.…” At this stage, he observed, the Fed doesn’t know what goods will be hit by higher tariffs, which countries or for how long. And he said it doesn’t know how much trading partners will retaliate or how consumers will react.

Powell also refused to be drawn into a dispute with the Trump administration over rate levels.

Last Thursday, President Trump fired a shot across the Fed’s bow three days after being inaugurated for a second term, when he told the World Economic Forum he “will demand that interest rates drop immediately….” During his first term, Trump repeatedly pressured the Fed to cut rates.

Asked about the peripatetic president’s assertions, Powell replied, “I’m not going to have any response whatsoever on what the president said.”

“We will continue to do our work as we always have (and) use our tools to achieve our goals…,” he continued. “We will keep our heads down and do our work.’

Powell said he has “had no contact” with Trump since he took office.

While holding rates steady, the FOMC continued to shrink its balance sheet, reiterating that “the Committee will continue reducing its holdings of Treasury securities and agency debt and agency

mortgage‑backed securities.” This means the Fed will continue to “roll off” $25 billion of maturing Treasury securities and $35 billion of agency debt and agency mortgage backed securities per month.

Powell gave no indication when the Fed might stop shrinking its bond portfolio but suggested here again there is no hurry. “Reserves are still abundant,” he noted. They remain roughly as high as when runoff began.”

He said the Fed will be “monitoring a range of indicators” to determine when to stop shrinking the balance sheet.

Regarding the uptrend in bond yields and in turn long-term interest rates like mortgage rates, Powell said this represents a “tightening of financial conditions,” but did not seem alarmed. He also said equities are highly priced, but said the Fed monitors a range of financial conditions.

The FOMC majority included four Federal Reserve Bank presidents who rotated into voting position in 2025, including two who had never voted before: St. Louis’s Alberto Musalem and Kansas City’s Jeff Schmid. The other two are Chicago’s Austan Goolsbee and Boston’s Susan Collins.

Regarding the FOMC’s periodic “Review of Monetary Policy Strategy, Tools, and Communications,” Powell said the Fed would be holding a number of Fed Listens events as well as a May conference on issues regarding monetary strategy but emphasized there will be no change in the inflation target.