Fed Set to Pause Rate Cuts, With No Clear Path to Resuming Federal Reserve officials this week are expected to stop cutting interest rates for the first time since September, holding steady after three consecutive reductions. The harder question is what it would take to start again.
The answer depends on which risk materializes first: a job market that breaks, or inflation that convincingly resumes falling toward 2%.Neither has happened since officials’ last meeting in December. Job growth has slowed sharply, but the unemployment rate has stabilized. Inflation remains stuck around 2.8%, above the Fed’s 2% target, though some officials think the underlying trend is closer to their goal once the effects of tariffs are stripped out.
The result is a committee in a holding pattern—even as the Fed faces extraordinary political pressure from the White House—with most officials still expecting rate cuts are possible later this year but disagreeing over when the data will justify doing so.
The Justice Department this month opened a criminal investigation into Fed Chair Jerome Powell, which he disclosed in a startling video statement casting the probe as a pretext to advance President Trump’s desire for lower interest rates. Last week, the Supreme Court heard arguments over whether Trump can fire Fed governor Lisa Cook, with several justices expressing skepticism about the president’s authority to remove her. Trump’s advisers have suggested he is close to announcing his choice to succeed Powell, whose term as chair ends in May.The Fed is likely to make only minor changes to its policy statement Wednesday while keeping its benchmark rate in a range between 3.5% and 3.75%. If officials retain language about considering “additional adjustments” to rates, that would suggest they aren’t ready to signal a longer pause.
Twelve of 19 officials projected in December that at least one more rate cut would be appropriate this year. But the December cut drew dissents from two officials who didn’t support any reduction, and several officials who supported it did so with reservations, That means the bar for any further reduction is higher. Fed leaders will likely want a stronger consensus than they had in December. Building that consensus will require more convincing evidence that inflation is falling.
Officials disagree over how to measure that progress. Some, including Powell, have indicated comfort “looking through” the effects of tariffs, which they say they believe are resulting in a one-time increase in prices. By that measure, the underlying inflation trend is already near 2%. But others focus on the official numbers, which are likely to remain closer to 3% in the first half of this year.
It could take several months of data to bridge that gap.
Officials will be watching inflation data closely in the first few months of the year for any sign of larger-than-usual price increases as companies reset prices for the new year. One question is whether retailers have exhausted inventories acquired before higher tariffs took effect and will begin to pass higher costs along to consumers. Muted price resets could remove one obstacle to cuts.Analysts say any rate cut before midyear would likely require deterioration in the labor market because inflation probably won’t fall fast enough to persuade skeptics before then. “Over the past 18 months, there’s basically been no progress on getting inflation down,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank. He expects the Fed’s next cut won’t come until September.
The case for continuing to cut rests on the concern that generated last year’s reductions: The job market is weaker than it appears, and higher rates have driven that softness. After accounting for expected downward revisions to government data, monthly job growth might be closer to zero than the official figures suggest, according to Fed staff estimates.
Philadelphia Fed President Anna Paulson noted that healthcare and social assistance accounted for nearly all net private-sector job growth last year. “If you think about an economy that feels solid and healthy, it seems like it would be generating jobs not just in one sector,” she said in an interview earlier this month.
At least one dissent is expected from Fed governor Stephen Miran, who has unsuccessfully pushed for more aggressive easing at every meeting since joining the committee in September. Governors Michelle Bowman and Christopher Waller, who have expressed more concern about the labor market than some of their colleagues, are also seen by analysts as potential candidates to vote for a cut.
Even if all three do so, it would represent a less fractured committee than December, when dissents came from opposite directions. Miran wanted a bigger cut while two regional Fed presidents opposed any reduction. This week, any dissents would come only from one side.
Waller’s vote could draw particular scrutiny. He is among the candidates Trump is considering to succeed Powell. A vote to cut rates—consistent with the president’s statements that he won’t pick anyone who disagrees with his demands for lower borrowing costs—could help his long-shot candidacy. A vote with the majority to hold might burnish his credentials as an independent voice but cost him the job.
