President Trump Keeps Fed Guessing: What’s Behind the Steady Interest Rates and Cautious Outlook

The US Federal Reserve announced its first policy decision for 2025 after a two-day Federal Open Market Committee (FOMC) meeting on Wednesday. It voted unanimously to hold benchmark interest rates steady at 4.25% to 4.5% after its last cut, reinforcing an expected cautious approach to further reductions in the year as inflation remains “somewhat elevated.”

In December policy meeting, US Fed policymakers voted 11 to 1 to lower the benchmark interest rate by 25 basis points (bps)

In addition, the Fed signalled it is in no rush to cut rates after easing policy by a full percentage point in late 2024. “We do not need to be in a hurry to adjust our policy stance,” Powell said, adding that the Fed needs to see “real progress” on inflation or significant weakness in the labour market before considering further cuts.

Markets were already expecting that the Fed would go slow on rate cuts this year after data suggested that inflation is still hovering over the central bank’s 2% target.

US inflation rose more than expected in December 2024 to 2.9% as the CPI had accelerated for the third month in a row. Fed chair said the future changes will be done after carefully assessing the incoming data, the evolving outlook and the balance of risks. It has promised to be data dependent, promising the markets that it is not on a “preset course”.

Additionally, it has continued to reduce its holdings of treasury securities, agency backed debt and mortgage-backed securities. In line with expectations, the policy was largely a non-event.

Powell indicated that labour market conditions remain ‘solid’. High Frequency data like PMI showed some slowdown as composite PMI fell to 52.4 (from 55.2 in the previous month) but signs of broad based slowdown in the US are largely absent.

Fed's Wait-and-Watch Approach

Analysts suggest that the Fed walked on expected lines and there wasn’t any major surprise element except for the fact that even the Fed is guessing what will be President Trump's next move.

Dhawal Ghanshyam Dhanani, fund manager at SAMCO Mutual Fund says this certainly gives the impression that FOMC wants to buy time to assess and digest the impact of the current administration’s policies on tariffs, tax cuts, deregulation and the like.

“Powell’s clarification on the 2% inflation goal appeared dovish, resulting in the softening of bond yields,” Dhanani added.

Apurva Sheth, head of market perspectives and research at SAMCO Securities says Fed followed a wait and watch approach and decided to see the impact of the policy measures which have been announced so far and likely to be announced going forward on inflation which remains elevated. It seems that interest rates are likely to remain steady atleast for next six months as Fed awaits for further data.

Ankita Pathak, Chief Macro and Global Strategist at Ionic Wealth by Angel One says the US markets are closely watching the Chinese AI evolution and that is being a bigger driver of heavy weights like Tech. A slowdown in capital markets could brush off to the economy and Fed will have to take cognizance of market turmoil.

While Trump has clearly stated his dissent on Fed’s hawkishness, Powell denied the claim saying the Fed is autonomous and is independently evaluating the macro regime for its dual mandate.

Pathak added that he policy was fully on expected lines, rendering no shocks to the market. US yields is at 4.5% whereas DXY is at 107, with capital markets driven by more drivers including tariffs, Chinese AI, policy formation ahead. Fed’s expectation is to deliver two rate cuts in 2025 and that could begin in the late Q2 of the year.

On the domestic front, RBI has started with liquidity easing and the rationale for 25bps rate cut in February is compelling, she said.