Federal Reserve maintains interest rates steady, persisting with wait-and-see approach
The Federal Reserve, smack-dab in the middle of the week, decided to keep the federal funds rate right where it is at 4.25% to 4.5%. This decision, as predictable as a sunrise, marks the fourth time in a row they opted not to tamper with the benchmark interest rates.
The U.S. economy is hummin' along, thanks to the robust expansion in economic activities, which has the Fed taking a chill pill, biding its time. Unemployment rates are still as low as a snake's belly, the labor market is thriving, and inflation, well, it's taking a bit of a nose-dive, as per the Fed.
In 2025 and 2026, the Fed expects the unemployment rate to creep up to 4.5%, with 4.5% remaining the expectation for 2026. The growth forecast for 2025 and 2026 has been revised down to 1.4%, but the Fed isn't losing sleep over it.
Curiously, Fed officials expect core PCE inflation to shoot up to 3% in 2025, from the earlier forecast of 2.7%. Inflation is expected to cool off to 2.4% by 2026, but it's still simmering above the Fed's ideal temperature of 2%.
The latest projections suggest that the Fed might find itself in a bit of a pickle when it comes to lowering rates due to the persistently high inflation, thanks to tariffs and supply chain disruptions making life tough.
In a press conference, Fed Chair Jerome Powell, on a Wednesday afternoon, suggested the Fed is prepared to play a waiting game, observing the economy's moves before diving into any adjustments. Tariffs, according to Powell, need time to trickle down to the end consumer.
Trump, as expected, put in his two cents, lashing out at Powell mere hours before the Fed dropped its decision. Trump claimed he expected nothing from the meeting and wouldn't be surprised if he did a better job than Powell, should he get the chance.
The Trump administration recently said it'd be announcing a nominee to replace Powell, whose term ends in May 2026. Cue the drumroll—Powell himself was the Trump administration's appointment for Fed chair in 2018.
Paul Sheard, economist and former vice chairman of S&P Global, played it cool, stating that Trump's criticism of Powell was just another Trump power play and that Powell and the Fed will focus on doing their job.
However, the real danger, according to Sheard, would be if Trump replaced Powell with an unsuitable candidate. But Sheard reminded us that the Senate would act as a check and balance, keeping things in check.
Trump, the dealmaker, might be planning to wait it out before making a move, according to Sheard. No sacking of Powell is expected anytime soon!
The government is closely monitoring the economy, taking note of the Fed's decision to maintain the federal funds rate and the forecasted inflation. The Fed's expectations of higher core PCE inflation in 2025 might lead to challenges in the finance sector, especially if lowering rates becomes necessary due to persistently high inflation.
Business leaders, like Paul Sheard, are keeping a watchful eye on the potential impact of the Fed's decisions and potential changes in leadership, especially if the administration nominates a candidate perceived as unsuitable for the position of Fed chair.
