Opinion In Trump’s shadow, US Fed holds rate

In its first meeting of the year, the US Federal Reserve voted to keep interest rates unchanged. The target range for the federal funds rate remains at 4.25 to 4.5 per cent. While the central bank shied away from providing any forward guidance, most economists expect it to hold rates in its next meeting as well. The markets have reacted negatively. The Dow ended the day down 0.31 per cent, while the S&P 500 fell by 0.47 per cent.

The Fed noted that economic activity was expanding at a “solid pace”, and unemployment had “stabilised at a low level”, while inflation remained “somewhat elevated”. Recent data points to the strength of the US labour market. In December 2024, 2,56,000 jobs were added, significantly outstripping expectations. The unemployment rate edged downwards to 4.1 per cent, underlining the strength of the growth momentum. However, data from the US Labour Department showed that inflation, as measured by the consumer price index, rose to 2.9 per cent in December, up marginally from 2.7 per cent in November, indicating that the last mile of disinflation is proving to be difficult. Sticky inflation coupled with a strong labour market suggests less scope for greater policy easing. In his comments, Fed chair Jerome Powell noted that the central bank would have to see “real progress on inflation or some weakness in the labour market before we consider making adjustments”.

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The uncertainty before the global economy, and the Fed, is how Donald Trump’s policies on tariffs, taxes and immigration will play out. Powell is reported to have said that “the committee is very much in the mode of waiting”. However, the Fed has come under criticism from Trump. On a social platform, the US President said that “the Fed failed to stop the problem they created with inflation”. He added that “if the Fed had spent less time on DEI, gender, ideology, ‘green’ energy, and fake climate change, inflation would never have been a problem”. This comes after Trump is reported to have told business leaders via video at the World Economic Forum in Davos that “with oil prices going down, I’ll demand that interest rates drop immediately, and likewise they should be dropping all over the world”. While Powell responded by saying that it would not be appropriate to comment on what the President says, he has pushed back. Asserting the Fed’s independence, he said that the “public should be confident that we will continue to do our work as we always have focusing on using our tools to achieve our goals and keeping our heads down”.