The Federal Reserve opted to keep interest rates unchanged on Wednesday, signaling a cautious approach in the face of rising inflation. Fed Chair Jerome Powell announced that the central bank is entering a "new phase" of monetary policy, where further rate cuts will be considered with caution. The anticipation of rate reductions has been pushed to late spring or early summer, influenced by the recent uptick in year-over-year inflation from 2.5% to 2.9% since September.
The Fed's decision to maintain the benchmark rate between 4.25% to 4.5% follows a series of reductions that began in September 2024. During this period, the rate saw a total decrease of 1%, with an initial 50 basis point cut, followed by additional 25 basis point cuts in November and December. These adjustments aimed to curb spending and bring down inflation. However, the effects of President Trump's proposed tariffs on foreign goods remain uncertain, adding complexity to the Fed's policy decisions.
Mortgage rates, while closely tied to 10-year Treasury yields, are indirectly influenced by the Fed's benchmark rate. The central bank had previously projected two 25-basis-point rate cuts for 2025, yet the timing now appears less certain. A CNBC survey indicates a decline in economists' expectations for rate cuts; only 65% anticipate two rate reductions, down from 78% in December. The perceived odds of a rate cut occurring by March stand at just over 28%.
The Fed's benchmark rate has a direct impact on interest rates for auto loans, personal loans, and credit cards, affecting consumer borrowing costs. By reducing the policy restraint gradually, the Fed aims to sustain progress on inflation without derailing economic recovery. As Powell noted:
"We know that reducing policy restraint too fast or too much could hinder progress on inflation." – Jerome Powell