At the Federal Reserve’s first meeting in 2025, consumers are going to want what Fed Chair Jerome Powell simply can’t give them: An answer to how much longer interest rates are going to stay high.
Americans got a taste of the rate cuts they were craving last year. With inflation slowing and the job market flashing warning signs of an abrupt slowdown, officials on the Federal Open Market Committee (FOMC) slashed their benchmark financing rate a full percentage point across three consecutive meetings. The federal funds rate now holds in a target range of 4.25-4.5 percent.
Those cuts didn’t appear to take much pressure off of consumers. Most consumer borrowing costs remain the highest in over a decade, according to data tracked by Bankrate. The 30-year fixed-rate mortgage, meanwhile, actually ended up increasing despite the Fed’s cuts.
The FOMC doesn’t look like it’s going to cut interest rates a fourth consecutive time when it wraps up its two-day meeting on Jan. 29. Experts say a cut at the Fed’s next rate-setting gathering in March might not happen, either, if inflation stays sticky and the economy remains resilient.
President Donald Trump’s tariff, immigration and tax policies could also complicate the Fed’s rate-cutting plans if they fuel more inflation. At the World Economic Forum’s annual meeting on Thursday, the chief executive said he’d “demand” interest rates drop “immediately,” his first comments on Fed policy since the start of his second term.
The question now: Is this no-move meeting just a short skip or the start of a prolonged pause?
There’s nothing in the data that compels the Fed to be in a hurry to cut rates. This is looking more like a pause and less like a skip.
— Greg McBride, CFA, Bankrate chief financial analyst
Economists say the Fed’s next rate cut could be in March — or even later
Powell himself foreshadowed that rate cuts may be on hold. In their post-meeting assessment of the economy, policymakers admitted that inflation was cooling more slowly than they had hoped. Powell said officials still think they’re on track to cut interest rates more this year, but they want to first gain more confidence that inflation is back on track.
A stable job market is also affording them time to be patient, he added. Fed officials have two economic objectives: low and steady inflation (or price stability) and ensuring everyone in the labor market who wants a job can find one (maximum employment).
“The slower pace of cuts for next year really reflects both the higher inflation readings we’ve had this year and the expectation that inflation will be higher,” Powell said. “If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we can ease policy more quickly.”
At the time, many market participants thought the Fed would be on the sidelines for only one meeting. Last month, investors saw a 91 percent chance that officials would keep borrowing costs steady in January and a 45 percent chance that they’d pick back up with rate cuts by their next meeting in March, according to CME Group’s FedWatch tool.
But little has changed on the inflation front. Prices in December rose for the third straight month to 2.9 percent, up from as low as 2.4 percent in September, according to the Bureau of Labor Statistics’ consumer price index (CPI). Energy prices popped the most since August 2023, while shelter costs and motor vehicle insurance stayed stubbornly high.
The perceived odds of a March rate cut have since dropped to 28 percent as of Jan. 24, CME Group’s tool now shows.
“Between the December meeting and the March meeting, it did provide enough calendar room to see three full cycles of monthly economic data, particularly on the inflation front,” McBride says. “But unless there’s a rapid reversal in the next two months, a March rate cut seems unlikely.”
Fed officials will likely avoid closing the door completely to a March cut, according to Greg Daco, chief economist at EY. Price pressures have improved rapidly since peaking at a 40-year high of 9.1 percent in the summer of 2022, and many metrics give him hope that inflation will keep cooling. Those include slowing wage growth, Americans’ diminishing savings and a smaller jobs-to-workers ratio — all of which suggest businesses may have less pricing power and consumers could be more sensitive to price hikes.
“Fed policy needs to be forward-looking,” Daco says. “Policymakers take every data release and extrapolate to infinity — that if a reading is stronger than expected, all future readings are expected to be stronger.”
Division may also be growing among Fed officials about what to do next. In an interview with CNBC, Fed Governor Christopher Waller looked past the December pick up in inflation and instead noted slower price increases among items outside of food and energy.
If we continue getting numbers like this, it’s reasonable to think that possibly rate cuts could happen in the first half of the year.
— Christopher Waller, Fed governor
However, Cleveland Fed President Bethany Hammack — who dissented against the Fed’s decision to cut interest rates in December — urged caution in a January interview with The Wall Street Journal, saying “we still have an inflation problem.”
Trump 2.0 era may also be keeping the Fed in ‘wait-and-see’ mode
There are also risks that inflation could gain speed again. Powell will likely be asked about Trump’s trade, immigration and tax policies, which could potentially lead to higher prices, according to economists surveyed in Bankrate’s latest Economic Indicator Poll.
In the months since Trump’s election, the chief central banker has repeated that it’s too soon for the Fed to make fiscal policy part of its interest rate deliberations.
“There’s nothing to model right now,” Powell said first at a Nov. 7 press conference. “We don’t guess, we don’t speculate, we don’t assume.”
Behind closed doors, though, the FOMC might already be discussing it. Fed staffers are likely running different economic scenarios from any of Trump’s policies and informing the committee about the results, according to Bill English, a professor at the Yale School of Management who formerly had one of the most influential staff positions at the central bank as director of the FOMC’s Division of Monetary Affairs.
“You have to make some set of assumptions to do your forecasting,” English says. “Then, the committee has to make the judgment call: How much do they want to see or predicate their policy decisions on?”
Powell told reporters in December that “some” policymakers had already incorporated “highly conditional estimates of economic effects” from fiscal policy in the forecasts that they updated in December. Others didn’t, and some people didn’t say whether they did or did not, he said.
It could mean that Trump’s policies, not just higher inflation over the past few months, played a role in shifting the Fed’s rate cut estimates for 2025. In projections updated in December, enough policymakers penciled in fewer rate cuts for 2025 that the median forecast fell from four cuts to just two.
Not discussing fiscal policy is one thing when it comes to monetary policy independence, but that does not mean you cannot consider fiscal policy in your monetary policy framework. It risks being consistently behind the curve.
— Gregory Daco, chief economist at EY
Powell himself revised his rate forecasts after Trump’s election in 2016, when he was still a Fed governor. As Fed chief, however, he’s been more mum on fiscal policy. During Trump’s first term in the Oval Office, he likened Powell to a golfer who “doesn’t know how to put” and frequently insisted that the Fed cut interest rates. The chief executive renewed those jabs this week.
“I think I know interest rates much better than they do,” he said from Davos, Switzerland, on Thursday. “I think I know it certainly much better than the one who’s primarily in charge of making that decision.”
What a Fed on hold means for your money
The Fed keeping interest rates steady this month means that the financing costs consumers see across the market are bound to stay historically high, underscoring the importance of chipping away at high-cost debt, continuing to find the best places to park your cash and bracing for any volatility in financial markets.
Just like pricey financing costs, though, inflation also makes it more expensive to live. Prices are up 22.5 percent since February 2020, requiring an extra $225 for the same goods and services that used to cost $1,000. The Fed’s rationale for keeping interest rates high is that it will weaken price pressures — and hopefully give Americans a chance to catch up.
- Prioritizing eliminating your high-cost debt: Despite a full percentage point of cuts, credit card rates have fallen just 63 basis points. Even when borrowing costs were ultralow during the pandemic, credit card rates hovered above 16 percent, according to Bankrate data. Rates are unlikely to ever fall enough to make credit card debt feel manageable. A balance-transfer card with a 0 percent introductory annual percentage rate (APR) might be able to help you speed up your debt repayment, depending on your balance.
- The good times for savers are continuing: Yields didn’t fall as much as they were expected to in 2024, and returns on high-yield savings accounts and certificates of deposits (CDs) are bound to stay high along with the Fed’s key rate. With price pressures still elevated, however, you’ll continue to lose purchasing power by keeping your cash on the sidelines in a traditional brick-and-mortar bank paying next-to-nothing in interest. The right account can help you grow your emergency fund faster.
- Stay the course through stock market volatility: The stock market has been rallying on the expectation that Trump will cut corporate taxes and loosen regulation. It’s been a different story, however, for the bond market, where Treasury yields are surging on the expectation that stricter immigration and trade could exacerbate inflation. Volatility could be in store, but don’t fret if you’re a long-term investor with a diversified portfolio, according to McBride.
“We’ve been lulled to sleep with a lack of downside volatility in the market,” McBride says. “And that will surely crop up again.”
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