Fed cited elevated inflation, labour market conditions as key factors for the decision
The US Federal Reserve has unveiled its key interest rate decision for January.
The central bank has decided to keep interest rates steady, currently holding the benchmark rate at its current range between 4.25 per cent to 4.5 per cent.
The decision comes less than a week after US President Donald Trump demanded interest rates “drop immediately” at the World Economic Forum in Davos, Switzerland. This also comes as no surprise to most forecasters who predicted rates would remain unchanged.
“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run,” a statement from the Fed’s release said. “The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.”
Reasons for the decision have been attributed to inflation remaining “somewhat elevated”, currently at 2.9 per cent, well above the Fed’s target of 2 per cent. Additionally, the US labour market has not deteriorated.
According to the US Bureau of Labor Statistics, the Consumer Price Index (CPI) for all urban consumers rose 0.4 percent, seasonally adjusted, and rose 2.9 percent over the last 12 months, not seasonally adjusted.
Meanwhile, the index for all items less food and energy increased 0.2 percent in December, up 3.2 percent over the year, CPI data showed.
President Trump’s tariff threats to other countries like Canada are also a reason for the Fed’s decision to hold, as an implementation of tariffs could signal weak economy for some areas of the US, notably agriculture, manufacturing, and technology.
Trading partners often respond with their own tariffs, making American exports more expensive and less competitive in global markets.
Additionally, higher costs and uncertainty around trade policy can lead to reduced business investment, dampening overall economic expansion.
Today’s pause in cuts comes after a flurry of rate cuts that started in September last year, with each cut dropping one percentage point consecutively over three meetings, originally from 5.25 per cent.
As for the next rate cut, Americans will have to wait because it might not happen until the central bank's May 7 meeting. Most economists predict Fed chair Jerome Powell will hold off on cutting at its next meeting on March 19.
Consequently, a recent CNBC Fed survey found that 65 per cent of respondents expect two rate cuts to happen this year.
Powell’s decision shows that Fed policy isn't on a preset course, and that the Federal Open Market Committee is making its decisions meeting by meeting, a return to the “data-dependent” mantra that officials professed for most of last year.
“In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective,” the statement said.
