The Federal Reserve is taking a breather as the monetary authorities assess conditions. As a result, the U.S. economy will endure higher interest rates and elevated inflation for longer than many expected.
Economic observers are digesting the Fed’s latest policy inaction and how it will funnel through into the broader economy and the political arena.
The U.S. central bank left interest rates unchanged at the January policy meeting for the first time in its easing cycle, which commenced in September 2024. The benchmark federal funds rate—an influential force for interest rates on credit cards and mortgages—was left alone at a range of 4.25 percent to 4.5 percent.
Fed Chair Jerome Powell offered little indication that it would pull the trigger on another rate cut anytime soon.
“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,” Powell told reporters at the post-meeting press conference.
Powell suggested that the Fed can afford to adopt a wait-and-see approach. U.S. economic growth prospects remain solid, and the labor market is stable.
The gross domestic product, a gauge of the goods and services produced in America, expanded at an annual rate of 2.3 percent in the fourth quarter, falling short of the consensus forecast. The unemployment rate is at a historically low 4.1 percent.
While officials think progress is being made on the inflation front, Powell acknowledged that price pressures persist.
Trump and Tariffs
This did not please President Donald Trump, who recently demanded that the Fed—and other central banks—lower interest rates immediately.“If the Fed had spent less time on DEI, gender ideology, ‘green’ energy, and fake climate change, Inflation would never have been a problem,” the president wrote on Truth Social. “Instead, we suffered from the worst Inflation in the History of our Country!”
Tariffs could also put a wrench in the Fed’s plans.
The new administration has yet to outline a tariff policy blueprint. Trump has threatened to impose levies on Canada, Mexico, and China as early as Feb. 1. Colombia and Taiwan have been other targets for potential tariffs.
Because the White House has refrained from laying out its trade framework, the Fed has been unable to craft a responsible policy framework.
“The range of possibilities is very, very wide,” Powell said. “We don’t know for how long or how much, what countries. We don’t know about retaliation. We don’t know how it’s going to transmit through the economy to consumers. That really does remain to be seen.”
While Fed officials have refrained from speculating on what instruments they could employ should Trump follow through on his universal tariff proposal, the president’s first term could serve as an indicator.
Trump pressured the central bank to lower rates throughout his first term. In 2019, the Fed proceeded with three quarter-point rate cuts to boost the U.S. economy, which had shown signs of slowing amid trade strife and weak global growth.
Stephen Brown, deputy chief North America economist at Capital Economics, believes that a 10 percent universal levy and 60 percent tariffs on China could push up inflation by 1 percentage point. This would ensure that the Fed misses its 2 percent inflation target.
Brown says tariffs create a one-off impact on inflation, but there could be secondhand effects. For example, consumers could shift their buying preferences to U.S.-made products, which might boost inflation.
Would a rate hike be in the cards if inflation persists and even ticks up?
“The Fed wouldn’t be anticipating hiking interest rates. It would just keep policy on hold,” Brown said in a Jan. 30 webinar.
Economists have presented various outlooks based on the information presented during the 2024 election campaign.
The Tax Policy Center, for instance, has projected that a universal tariff would rekindle inflation and lower tax revenues.
Others say that Trump’s tariff plans will have little effect, citing what occurred in his first term. Instead, according to Nancy Tengler, the CEO and CIO of Laffer Tengler Investments, these levies will be wielded more as negotiating tactics.
‘Affordability Hurdles’
Heading into the Federal Reserve’s rate-cutting cycle in September, government bond yields began falling. However, after the central bank followed through on a super-sized half-point interest rate cut, yields on U.S. Treasury securities traveled in the opposite direction.As a result, borrowing costs are unlikely to get any more affordable, says Greg McBride, chief financial analyst at Bankrate.
“Borrowing costs remain high—for mortgages, home equity lines of credit, auto loans, and especially credit cards—which will keep a lid on home and auto sales but also require aggressive debt repayment efforts from consumers with high-cost debt that won’t be getting any cheaper,” McBride said in a statement to The Epoch Times.
Sam Khater, Freddie Mac’s Chief Economist, says this is worsening housing affordability.
“The 30-year fixed-rate has hovered between 6 percent and 7 percent for most of the last two and a half years. That trend continued this week, with the average rate remaining essentially flat at 6.95 percent,” said Khater.
“Driven by these higher rates and a persistent supply shortage, affordability hurdles still exist for many homebuyers and a significant number of them remain on the sidelines.”
Of course, it varies based on borrowers’ credit scores. An individual with a low score could face a maximum rate of 27.73 percent. Somebody with solid credit could enjoy a minimum rate of 20.79 percent.
The Fed deciding to leave rates higher is not bad news for everyone, including savers.
“Savers will continue to enjoy returns that outpace inflation if the money is parked in the most competitive savings accounts, money markets, and CDs,” McBride added.
