At the Federal Reserve’s final gathering of 2024, Chair Jerome H. Powell announced that the U.S. central bank was embarking on a “new phase” in how it would set interest rates. ¹

The Fed said they planned to “move cautiously” with cuts going forward, saying they could afford to be patient with little signs of an impending recession and lingering inflationary pressures. The Fed has put that approach into action, pressing pause on further reductions for the first time since September. ¹

The question now is, how long will the Fed be on hold?

The current administration claims to have a better understanding of interest rates than officials at the Fed and has communicated a pause of any length is too long. But for policymakers and the economists, investors and former Fed officials, the timeline looks to be very different.

According to Loretta Mester, who recently retired as president of the Cleveland Fed, “There is no compelling reason to cut.”  She also stated there needs to be more convincing evidence that inflation has resumed moving downward and currently doesn’t see evidence of that. ¹ Rates are now set in a range of 4.25 percent to 4.5 percent, after recently peaking above 5 percent.

The data since the beginning of 2025 has diminished some concerns but not eliminated them completely. Overall inflation, as measured by the Consumer Price Index, rose more than expected in December to 2.9 percent (comparatively year-over-year), and was also the third consecutive month of acceleration. There were also signs that volatile food and fuel price trends were calming, and job growth has stayed surprisingly strong at the end of 2024. 

Yields on government bonds that underpin borrowing across the economy have risen sharply since November, which reflects changing expectations about the economic outlook and in turn how much the Fed can lower interest rates. 

The wildcard remains Trump and potential looming tariffs. Economists expect those policies to result in higher prices for Americans, but the question is whether they will result in a one-off increase for consumers or kick off successive rounds of price spikes that would require the Fed to act. 

There will need to be confirmation of inflation risks that so far aren’t coming to fruition.“As long as the economy remains resilient, there’s a case for waiting to see how these things play out and what the effects are,” said Donald Kohn, a former vice chair of the Fed.¹

Sources:

1 - https://www.nytimes.com/2025/01/28/business/fed-rate-cute-pause-why.html

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