The Federal Open Market Committee voted unanimously today to keep the Federal Funds rate unchanged in a range of 4.25%-4.5%, after lowering rates by a full percentage point in the final months of 2024. Federal Reserve Chair Jerome Powell said officials are not in a rush to lower interest rates, adding the central bank is pausing to see further progress on inflation following a string of rate reductions last year.
We won’t get another update on the probable trajectory of Federal Reserve interest rate policy until the central bank updates its Dot Plot projections at its March 19 meeting. But meanwhile, we have a survey from CNBC that shows a majority of respondents–and this is a small sample of hust 25–still believe we’ll get two interest rate cuts from the Fed in 2025. But that faith in that two-cut scenario is fading.
I expect Wednesday’s meeting of the Federal Reserve’s Open Market Committee to be the big event. Not because the Fed will do anything unexpected on interest rates. It won’t change its benchmark policy rate now at 4.25% to 4.50%. But because the Fed might say something that hints on whether and when it might cut interest rates again.
That was quicker than I expected. On Thursday President Donald Trump used a virtual address at the Davos World Economic Forum to pick a fight with he Federal Reserve and Fed chair Jerome Powell. I wasn’t expecting the President to go after the Fed until Wednesday, January 29–assuming, as now looks just about certain, that the Fed doesn’t cut interest rates at its meeting that day.
Assuming that conventional economics still has some validity and that economic history has some predictive value, Paul Krugman, who won his 2008 Nobel-prize in economics for his work on international trading patterns, has put some numbers on the likely effects of the higher tariffs proposed by President Donald Trump. In his Substack (Krugman left the New York Times after 25 years at the end of 2024) he laid out this math.
Imports are about 11% of U.S. GDP. A first-pass estimate would be that tariffs on the scale Trump is threatening would be a 25% sales tax on goods that account for 11% of consumer spending. That would raise the cost of living by almost 3%–well over 3% if, as Trump has said he intends in some speeches, he puts much higher tariffs on imports from China. Since median household income is more than $80k, that’s around $2500 a year for the typical household.
As of noon New York time today, January 15, the Standard & Poor’s 500 was ahead 1.30%. The NASDAQ Composite and the small-cap Russell 2000 were both up 1.80% on the session. Today’s big moves come on relatively minor changes in inflation trends in this morning’s report on CPI inflation in December. And I think they have more to do with how afraid Wall Street is that the Federal Reserve isn’t going to deliver at least one or two interest rate cuts in 2025 than with any big news in today’s report. The consumer price index (CPI) rose at an annual rate of 2.9% in December, up from a 2.7% annual rate the previous month. That increase was in line with expectations. On a month-to-month basis, the index rose 0.4%. The “core” index, which strips out volatile food and energy prices and is much more important to the Fed than the headline inflation number, rose at a 3.2% annual rate in December. That was down slightly from its annual rate of 3.3% in November, and less than economists had expected. It’s this dip in the annual rate of core inflation that has investors feeling so optimistic today.
In December U.S. economy in December added the most jobs since March and the unemployment rate unexpectedly fell. Nonfarm payrolls increased 256,000, exceeding all but one forecast in a Bloomberg survey of economists. The unemployment rate fell to 4.1%, while average hourly earnings rose 0.3% from November, a Bureau of Labor Statistics report showed Friday. For 2024 as a whole, the economy added 2.2 million jobs—-below the 3 million increase in 2023 but above the 2 million created in 2019. The data almost certainly assured that the Federal Reserve would not cut interest rates at its January 29 meeting. As of 11 a.m. New York time, the yield on the 10-year Treasury had climbed another 5 basis points to 4.74%.
In minutes from the Federal Reserve’s December 17-18 meeting released on Wednesday, January 8, Federal Reserve officials clearly decided to move more slowly on cutting interest rates in the quarters ahead. “Participants indicated that the committee was at or near the point at which it would be appropriate to slow the pace of policy easing,” minutes from the Federal Open Market Committee showed. “Many participants suggested that a variety of factors underlined the need for a careful approach to monetary policy decisions over coming quarters.” Please note the reference to “quarters” and not “months.”
The 20-year Treasury bond, a laggard on the government debt curve since its re-introduction in 2020, topped 5% Wednesday for the first time since 2023. The move looks to be fueled by concern that President-elect Donald Trump’s policies on tariffs and tax cuts will lead to wider deficits and rekindle inflation.
The Institute for Supply Management’s index of services advanced 2 points to 54.1 last month. That show of strength in the economy–readings above 50 indicate expansion–was enough to push stocks lower as the markets began to price in a delay in the next interest rate cut from the Federal Reserve until July The measure of prices paid for materials and services rose more than 6 points to 64.4, suggesting that the drop in the inflation rate in the service sector–about 70% of the U.S. economy–might be over.
In today’s quarterly update to its projections on economic growth, inflation, and interested rates in its Dot Plot survey of sentiment, Fed officials and governors forecast fewer rate cuts for next year than in their September projections, and they saw the fight against inflation making considerably less progress in 2025. According to the median estimate, they now see the benchmark interest rate reaching a range of 3.75% to 4% by the end of 2025. That would mean just two 25 basis-point cuts. The Fed’s projections are considerably more pessimistic than investors or Wall Street economists are. A majority of economists surveyed by Bloomberg had expected the median estimate would point to three cuts next year.
Today, December 18, the Federal Reserve lowered its benchmark interest rate for a third consecutive time.The Open Market Committee voted 11-1 to cut the federal funds rate to a range of 4.25%-4.5%. Cleveland Fed President Beth Hammack voted against the action, preferring to hold rates steady.
