The Federal Reserve held interbank lending rates steady on Wednesday at a range of 4.25 to 4.5 percent despite some signs that the economy may be heading for a slowdown.
The decision to keep rates where they are was in line with market expectations. The CME FedWatch prediction algorithm based on futures contract prices registered on Wednesday a 99 percent probability that the Fed would hold rates steady.
The Fed has paused rate cuts for the second straight meeting since January. The central bank cut rates three times during the end of 2024 in response to weakening employment data and easing prices.
Since then, inflation has ticked back up toward a 3-percent annual increase, putting monetary policymakers in a squeeze between the rock of rising price increases and the hard place of potentially slowing growth.
Concerns about U.S. economic growth have become more pronounced in recent weeks amid dampened consumer and business sentiment, a pullback in consumer spending and a rash of new tariffs and quick retreats by the Trump administration.
The Fed is seeing lower growth for the economy this year, lowering its economic projections for gross domestic product (GDP) by nearly half a percentage point from 2.1 percent annual growth to 1.7 percent.
The central bank sees slightly higher unemployment for this year than it did in December, moving its number up from 4.3 percent to 4.4 percent on the year.
Inflation is expected to be higher as well. Personal consumption expenditures (PCE) will be 2.7 percent this year, the Fed predicts, as oppose to 2.5 percent. Core inflation, which ignores energy and food prices, will also be higher at 2.8 percent annual growth than 2.5 percent, as predicted in December.
Surveys by the University of Michigan and New York Fed have shown increasing pessimism among households about their economic prospects and a substantial uptick in year-ahead inflation expectations. Personal consumption fell by $30.7 billion, or 0.2 percent, in January.
The drop in spending was due to a $76.7 billion decrease in spending for goods — a pullback that happened at the same time businesses have ramped up goods imports ahead of expected tariffs from the Trump administration. Total business inventories are now at an all-time high, signaling a potential mismatch between demand and the supply of consumer goods.
“By frontrunning the tariffs and bringing a lot of that stuff in ahead of anticipated tariffs – if the underlying demand hasn’t gone up … and it actually falls, as we’re seeing in a lot of purchasing behavior right now – you’re going to end up with excess inventory,” economist Willy Shih at the Harvard Business School told The Hill.
The U.S. trade deficit soared in January, rising 34 percent on the month to $131.4 billion. Raw materials imports increased by $23.1 billion, consumer goods imports increased by $6 billion, and capital goods imports increased by $4.6 billion, with a $3 billion rise in computers, according to Commerce Department data.
The continued pause from the Fed as the economic outlook shifts could incur the wrath of President Trump, who has frequently criticized the central bank, breaking with longstanding presidential precedent.
The Trump administration has been making wide-ranging staffing cuts to many different federal agencies, and there’s no guarantee that the Fed isn’t also in its sights, despite the central bank’s independence.
“On Tuesday, President Trump fired both Democratic Commissioners of the Federal Trade Commission. Aside from the obvious implications for the FTC, the news could signal that similar actions could be taken at the Fed. Investors will be occupied with today’s FOMC meeting but, longer-term, the FTC firings might have policy implications for the central bank and monetary policy,” Brian Gardner, chief policy strategist at Stifel, wrote in a Wednesday analysis.
Last year, the Wall Street Journal reported that Trump allies had come up with a plan to reduce the independence of the Fed and bring it more directly under control of the executive branch.