Fed chair Powell revisits familiar goal after rate cut decision

After several aggressive interest rate hikes to stifle inflation in 2022, the Federal Reserve holding interest rates had become standard practice. However, the central bank signaled a pivot in its monetary policy in the fall 2024 as inflation approached 2%.

Once inflation had fallen to 2.4% in September and the labor market showed improvement, the Fed unveiled a 0.5% interest rate cut and a plan to aggressively cut rates through 2025.

However, a months-long uptick of inflation beginning in October called future rate cuts into question.

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The revised federal funds rate forecast now makes just two rate cuts for the whole year more likely, and even those will be dependent on curbing the impacts of inflation and maintaining high employment levels.

Economists and financial experts had anticipated a pause in interest rate cuts following the January Board of Governors meeting, especially with a new presidential administration taking office this month.

However, little guidance was given on if — or when— interest rates will be lowered in the future.

U.S. President Donald Trump and Federal Reserve Governor Jerome Powell are seen at a nomination ceremony at the White House in Washington D.C. in 2017. Powell has announced that the Fed will hold interest rates to assess inflation and the labor market.

Xinhua News Agency/Getty Images

The Fed is taking a ‘watch and wait’ approach to monetary policy

Federal Reserve Chairman Jerome Powell had previously noted that the board would factor Trump policies into its policy calculations as the executive branch’s agenda materializes.

While no official legislation has been passed, the threat of imposing tariffs on key trading partners and mass deportations could cause inflation to skyrocket again and crater the labor market. Whether official policies are implemented — and how the economy responds — will likely shape when the next wave of rate cuts is announced.

For now, the Fed is monitoring the economy but hesitates to make any major changes to its monetary policy.

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“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 said. “The committee will assess incoming data, the evolving outlook, and the balance of risks. We are not on any preset course.”

While Powell revealed little about the Fed’s plan of action, it is becoming more likely that interest rates will also be held at the upcoming board meeting in March. The CME FedWatch has reduced the probability of a March rate cut to 18%, down from 31% yesterday.

The Fed will continue to monitor inflation levels and work to bring them closer to its goal of 2%, but compounding factors may make that challenging.

Inflation and labor market are top indicators for future rate cuts

The monthly CPI release from the Bureau of Labor Statistics and Jobs reports from the Department of Labor will become increasingly crucial in 2025 Fed board meetings. Powell has continued to reiterate his commitment to taming inflation and maximizing employment.

However, if President Trump does move forward with mass deportations and waging tariffs against China, Mexico, and Canada, it could have a devastating impact on the economy.

Related: Fed chair Jerome Powell issues warning on inflation, weak housing market

The U.S. economy is projected to reach a baseline level of 1.5% real annual GDP growth and average an inflation rate of 1.9% between 2025 and 2040. However, the Peterson Institute for International Economics found that Trump’s policies would lower employment, raise inflation, lower the national income, and cause the U.S. GDP to plummet between $750 billion and $2.57 trillion below the baseline.

Both proposed policies could prevent any rate cuts this year, especially if inflation rises significantly.

“If the economy remains strong and inflation does not continue to move sustainably toward 2%, we can maintain policy restraint for longer,” he continued.

“If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we can ease policy accordingly. Policy is well positioned to deal with the risks and uncertainties that we face in pursuing both sides of our dual mandate.”

Related: Veteran fund manager issues dire S&P 500 warning for 2025