Finance
Fed meets for first time since Trump’s term started. What to expect
US Federal Reserve Chairman Jerome Powell speaks at a press conference after the Monetary Policy Committee meeting in Washington, DC, on December 18, 2024.
Andrew Caballero-Reynolds | AFP | Getty Images
The Federal Reserve gathers this week for the first time in the second presidential term of Donald Trump, who has already signaled that he wants lower interest rates.
If virtually every indication so far is accurate, the new leader of the free world is unlikely to get what he wants, at least not yet, as officials weigh multiple variables that could make policymaking difficult this year and are likely to keep the Fed on hold.
“They’re probably going to be taking a back seat,” said U.S. Bank chief economist Beth Ann Bovino. “Nobody knows what to expect from the White House. The policy moves are still very unclear, but we do know that a number of those proposals that have been talked about in the White House are a bit inflationary, and I think that’s going to keep the Fed in check.”
Indeed, market pricing is pointing to a near 100% certainty that the rate-setting Federal Open Market Committee will keep the central bank’s policy rate in a target range of 4.25%-4.5%, according to CME Group data.
In fact, traders see the Fed on hold until June, a span during which Trump’s plans for tariffs, regulations and immigration are likely to come more clearly into view. Trump said Thursday he will “demand that interest rates drop immediately,” though he does not have authority over the Fed’s decisions.
The Fed has cut rates at each of its last three meetings, reducing its short-term borrowing rate by a full percentage point. The rate decision will be released Wednesday at 2 p.m. ET.
Despite the White House pressure, central bankers should hold firm and take a break from policy changes, said former Dallas Fed President Robert Kaplan.
“It’s the right call to stay steady. Inflation progress is maybe not stalled but it’s going sideways, and you’ve got four or five big structural changes underway and about to unfold,” Kaplan, now a Goldman Sachs executive, said Monday in a CNBC interview. “The right thing to do is to do nothing in this meeting.”
Kaplan cited three changes that could be disinflationary: government spending cuts, regulatory review from the newly minted advisory panel dubbed the Department of Government Efficiency, and Trump’s “drill baby drill” approach to energy as well as expected efforts to make the sector’s architecture more efficient.
On the inflation side, Kaplan sees the potential for tariffs to boost prices higher, while mass deportations — which began in earnest this week — could drive up labor costs.
“What Trump obviously would love them to do is speed their analysis, speed their assessment of these new policies and act sooner, even than what they’re comfortable,” Kaplan said. “The job of the folks at the Fed, in this case, is to do their analysis and don’t act until you have confidence.”
This meeting will not feature an update of the Fed’s quarterly economic projections, including the “dot plot” of individual members’ estimates for where interest rates are headed. At the December meeting, participants reduced their expected number of rate cuts to two from four previously, assuming each cut is made in increments of a quarter percentage point.
Investors will be left to pore through the post-meeting statement, which is expected to be little changed, then turn to Chair Jerome Powell’s news conference at 2:30 p.m. ET.
Powell had a contentious relationship with Trump during the president’s first go-round in the Oval Office, from 2017 to 2021, and he likely will be asked to respond to the president’s demand for lower rates.
“The Fed must follow its legislative mandate,” former Kansas City Fed President Esther George told CNBC in an interview Friday. “Congress has told us it is to bring prices to a low and stable level. In the long run, this institution has to think about those objectives rather than be swayed by outside commentary and political pressure that will come its way, as it has for its entire existence.”
Fed holds on further interest rate cuts. (iStock)
Interest rates will stay higher for longer as the Federal Reserve pauses further interest rate cuts to give inflation room to drop closer to its 2% target rate.
The Federal Reserve held interest rates at 4.5% to 4.75%, prompted by strong economic indicators that gave the central bank more room to wait. Federal Reserve Chair Jerome Powell said at a press conference on Wednesday that the Fed intends to remain cautious about additional rate cuts so long as the job market remains solid and prices continue to climb.
“Over the course of our three previous meetings, we lowered our policy rate by a full percentage point from its peak,” Powell said. “That recalibration of our policy stance was appropriate in light of the progress on inflation and the rebalancing in the labor market. With our policy stance significantly less restrictive than it had been and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance.”
Gross domestic product (GDP) grew at an annual rate of 2.3% in the fourth quarter of 2024, slightly lower than the expected 2.6% growth rate. In December, annual inflation increased to 2.9%, rising modestly above the 2.7% annual inflation rate of the previous month, according to the Consumer Price Index (CPI) released by the Bureau of Labor Statistics (BLS). The labor market is stable, and unemployment is low, at 4.1% in December.
“The nation’s economy continues to be resilient against long-term economic setbacks, which means that the Fed is in no imminent need to continue its rate cuts,” CoreLogic Chief Economist Selma Hepp said. “And with the economic activity expected to remain robust and continue to post a 2%+ growth rate, the case for further monetary loosening in the coming months is increasingly less compelling.”
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Mortgage rates likely to remain elevated
Interest rates are likely to remain untouched until the second half of the year, which could delay relief for homebuyers, according to David Sober, the SVP of Enterprise Business Development at Voxtur Analytics.
“Interest rate reductions [are] not expected until the second half of the year,” Sober said. “This keeps the housing economy in an extended period of malaise, with affordability at its lowest point in memory. Independent mortgage banks will continue to dominate the mortgage market due to the ability to offer more innovative ways to buy homes. It will be a pleasant surprise if mortgage rates dip to 6% in 2025.”
One bright spot is that the incoming President Donald Trump administration could spur more substantial economic growth and, therefore, higher incomes, giving Americans more buying power. Moreover, lower household tax rates are anticipated to boost disposable household income even if incomes don’t rise, according to the Realtor.com Housing Forecast.
Beyond those scenarios, Hepp said home builders continue to add more new homes to supply and are offering rate buydowns on new construction, keeping those sales strong.
Homebuyers can find competitive mortgage rates by shopping around and comparing options. You can visit an online marketplace like Credible to compare rates with multiple lenders at once.
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What higher rates mean for your wallet
President Donald Trump said in a speech to economic leaders at the World Economic Forum in Davos, Switzerland earlier this month that he would “demand that interest rates drop immediately.” Powell declined to comment on the speech but said the Trump administration had not contacted him.
“As the economy evolves, we will adjust our policy stance in a manner that best promotes our maximum employment and price stability goals,” Powell said. “If the economy remains strong and inflation does not continue to move sustainably toward 2%, we can maintain policy restraint for longer.”
Consumers who may have anticipated a more aggressive rate reduction policy in 2025 will have to wait longer for relief from the high borrowing costs incurred during the rate increases that the Fed implemented in recent years to combat inflation.
“While inflation concerns have significantly abated, they still remain,” Michele Raneri, vice president and head of U.S. research and consulting at TransUnion said in a statement. “As a result, it is quite possible that there will be fewer rate cuts over the course of next year than anticipated only a few months ago. Consumers should continue to monitor their own credit scores and credit reports to make sure they are in the best possible position to act when rates do come down.”
Using a personal loan to pay off high-interest debt at a lower rate could help you reduce your expenses and put money back in your wallet. You can visit Credible to find your personalized interest rate today.
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