The Federal Reserve held steady on interest rates Wednesday, maintaining its cautious approach while leaving the door open for potential cuts next year. After a two-day policy meeting, the central bank kept its benchmark rate at the 5.25%-5.50% range, where it has remained since July 2023 following an aggressive hiking campaign to combat inflation.
“We’re not in a hurry to cut rates,” Fed Chair Jerome Powell told reporters during his press conference. “The economy is not sending any signals that we need to be in a hurry.” This measured stance reflects the delicate balance the Fed is trying to maintain between cooling inflation and supporting economic growth.
The Fed’s updated Summary of Economic Projections revealed policymakers now expect just two quarter-point rate cuts in 2025, down from the three they projected in September. This more conservative outlook suggests the Fed remains concerned about inflation’s stubborn persistence despite recent improvements.
Markets reacted with relative calm to the announcement. The S&P 500 briefly touched a new record high before settling slightly lower, while Treasury yields rose modestly. This muted response indicates investors had largely anticipated the Fed’s cautious positioning.
Recent economic data continues to present a mixed picture. November’s jobs report showed employers added 199,000 positions, while unemployment ticked down to 3.7%. Meanwhile, consumer price inflation has moderated to 3.2% annually, still above the Fed’s 2% target but significantly lower than the 9.1% peak reached in June 2022.
“The Fed is still in wait-and-see mode,” said David Wilcox, senior economist at Bloomberg Economics and former Fed research director. “They’re not ready to declare victory over inflation, but they’re also not seeing urgent warning signs from the labor market that would require immediate action.”
The central bank’s statement acknowledged “modest further progress” toward its 2% inflation goal, while noting that risks to achieving its dual mandate of price stability and maximum employment “are moving toward better balance.” This slight language shift represents a small but meaningful acknowledgment of economic improvement.
Powell emphasized that future decisions will remain data-dependent, with particular focus on employment figures, inflation readings, and financial conditions. “We’re looking at the totality of the data, not just one or two data points,” he said.
The Fed’s current stance marks a significant shift from early 2023, when markets had anticipated multiple rate cuts throughout 2024. Instead, the central bank has maintained higher rates for longer, concerned that premature easing could reignite inflation pressures. To date, the Fed has delivered just one cut this year – a 0.25 percentage point reduction in September.
Former Treasury Secretary Larry Summers, who accurately predicted inflation’s surge, remains cautious about the pace of rate cuts. “I think the Fed is right to move gradually,” Summers told Bloomberg Television. “The labor market hasn’t deteriorated enough to warrant aggressive easing, and inflation risks haven’t fully dissipated.”
Looking ahead to 2025, the economic outlook remains uncertain. The incoming Trump administration has proposed significant policy changes, including tariffs and tax cuts, which could reshape inflation dynamics. Powell declined to comment specifically on these proposals but noted the Fed would respond to economic conditions as they evolve.
Most economists expect the Fed to begin a gradual easing cycle in 2025, with the first cut likely coming in the second quarter. According to a recent Reuters poll, around 70% of economists forecast the Fed funds rate will end 2025 between 4.00% and 4.50%, implying three to five quarter-point cuts throughout the year.
For consumers, the Fed’s current policy means borrowing costs will remain elevated in the near term. Mortgage rates, which have already declined somewhat from their peaks in anticipation of future cuts, may see further modest decreases as 2025 approaches. Credit card interest rates, which closely track the Fed’s benchmark, will likely remain near multi-decade highs until cuts materialize.
Businesses face a similar outlook, with capital investment decisions complicated by high financing costs. However, the clarity provided by the Fed’s forward guidance offers some planning certainty for the coming year.
The Fed’s next policy meeting in late January will provide fresh insight into how officials are weighing incoming economic data. Until then, Powell’s message remains consistent: patience, caution, and data dependence will guide the path forward as the central bank navigates the final stages of its inflation battle.
