At the final assembly of the Federal Reserve in 2024, President Jerome H. Powell announced that the US central bank had embarked on the “new phase” in how interest rates would set.
The Fed planned to “move carefully” with cuts for the future, Mr. Powell told journalists at the time, reflecting the ideas of officials that they could afford to be patient with modest signs of impending recession and persistent inflation pressures. On Wednesday, the Fed is set up to put this approach to the action and for the first time since they began to reduce the cost of borrowing in September, he had pressed a break for a further reduction.
The question that is now threatened with great over Wall Street and Washington is how long the Fed will be suspended.
For President Trump, who in his first week in the office claimed that he had a better understanding of interest rates than fed officials, the pause of any length will be considered too long. When he spoke to the participants of the World Economic Forum in Switzerland Davos in Switzerland, he said that as his economic policies reduced the price of oil, “he demands that interest rates to fall immediately”.
But for the creators of politicians and economists, investors and former Fed officials who carefully monitor their actions, the timeline looks very different.
“There is no convincing reason to reduce,” said Loretta Mester, who left Cleveland Fed in June. “I would like to see the convincing evidence that inflation has continued to move down, and right now I don’t think we have it.”
Officials in the central bank laid the foundations for now over many months. After delivering the shock half point shock in September-he was concerned that the labor market was endangered too much weakening-Fed followed what he described as the “recalibration” phase. In November and December, this reduced interest rates by a traditional quarterly point, reflecting the fact that inflation, although still high, has relaxed enough to feel comfortable by reducing the cost of borrowing.
The rates are now set in the range of 4.25 to 4.5 percent, after it recently reached a peak above 5 percent.
However, the decision to re -reduce rates in December was a close call. One fed official voted against that and Record of the meeting Published at the beginning of this month showed that other officials were struggling with recent data that indicated progress in how inflation was back to 2 % Fed’s target.
Fed officials also had to deal with the ghost of seismic shock in economic policy after the election of Mr. Trump and his immediate return to the White House.
In comparison with Forecasts issued three months agopoliticians half of their projection To reduce interest rates in 2025 to only half a percentage point in December, because during 2025 and 2026 they increased their expectations on inflation.
For some officials, this shift included the prerequisites about what another Trump would bring, given his promises to enable tariffs to business partners, scoring bureaucracy, lower taxes and deporting millions of immigrants. Others have modified their predictions on the basis of incoming data and underline the debate that is still on whether the Fed policy settings are correctly tuned in the current circumstances.
Regardless of the reasons: “Almost all participants have assessed that the risks for the inflation outlook increased,” he said from the December meeting.
The data given from the turn of the year alleviated some concerns, but did not completely exclude them. Total inflation, measured by the consumer price index, increased more than expected in December to 2.9 percent compared to the same time last year – the third month in a row accelerated. The item was more encouraging and looked at the wider gauge, but with the “core” of a measure that removes the volatile prices of food and fuel, confirming that the basic trend has slowed down.
The growth of jobs also remained surprisingly strong in what economists said that it was a potential sign that businesses again after the summer slump again couples.
Government bond yields that support loans throughout the economy have increased sharply since November. This partly reflects the changing expectations of economic outlook and again how much the Fed can reduce interest rates. Some officials argued that this could help the central bank’s efforts to alleviate activity across businesses and households, but it depends on how long the higher costs of loans have been suffered.
“During the year, we learned that the economy could tolerate high interest rates a little more than the Fed was expected,” said Joseph Gagnon, former manager of the Fed. It believes that the level of interest rates that does not affect or delay growth – it calls a “neutral” rate – has increased compared to its level in front of the pandemy to approximately 3.5 percent. Most officials predict around 3 percent since December.
Mr. Trump is a big representative and how he plans to watch his vows of the campaign. Has already signed a number of executive orders aimed at terminating the cost of living costs that raged from the pandemic, induce skepticism From economists who ask how effective its approach will be focused on energy. He threatened tariffs in Colombia and promised to soon save products for products from the largest US business partners, Canada, Mexico and China.
Economists expect such politicians to result in higher Americans’ prices. The question is whether they only cause a one -off increase for consumers or start the subsequent wheels of price tips that would require the Fed to act.
This would mean leaving from the first term, when the more limited tariffs that Mr. Trump had imposed did not lead to steep prices. Fed rewrites from this period indicated a small horror of inflation impact, although policies caused sufficient growth concerns that the central bank leads to a reduction in interest rates by 0.75 percentage points.
Karen Dynan, a professor at Harvard, who was the chief economist of the Ministry of Finance during the Obama administration, told inflation this time. While the Americans expect, as inflation develops over time, has remained more or less under control despite the recent increase, Mrs. Dynan said that this situation should not be “taken for granted”.
“If the tariffs come to the high side and if the deportation bites more than expected, you can very well imagine that the inflation would come back and that could take the Fed for the whole year,” added Mr. Gagnon, who is now in Peterson Institute for the international economy.
In this background, the lane seems to have increased for further interest rates. Federal Futures Markets Federal Funds roughly expect the Fed to lower the rates twice this year, starting from June. The cut before this point, for example in March, would require more tangible evidence that inflation is heading below.
Donald Kohn, a former Vice -President of the Fed, said that officials would probably also need a confirmation that the risks of inflation that are “crystallizing”.
“As long as the economy remains resistant, there is a reason to wait for these things to play and what the effects are,” he said.
