The nation's central bank is likely to hold interest rates steady this week following President Donald Trump's return to the White House.
On Wednesday, the Federal Open Market Committee will announce its next interest rate decision. After a series of rate cuts to close out 2024, markets expect the Federal Reserve to hit pause. CME FedWatch, which estimates interest-rate changes based on market predictions, forecasts a nearly 100% chance as of Monday afternoon the Fed will hold rates where they are.
If the central bank holds this week, it could set up a conflict with Trump, who has repeatedly stated his desire for interest rates to continue falling.
"I'll demand that interest rates drop immediately, and likewise, they should be dropping all over the world," Trump said at the World Economic Forum's annual event in Davos this past week.
Fed Chair Jerome Powell has reiterated that the central bank makes its decisions independently of politics and acts primarily based on data.
The Fed meeting follows data showing a robust US job market in late 2024. The economy added 256,000 jobs in December, well above economists' expectations, and unemployment dropped to 4.1%.
"In the first half of 2024, we saw unemployment start rising, and it was a pretty good cause for concern," Cory Stahle, an economist at the Indeed Hiring Lab, said. "But then in the back half of the year, we've seen that the unemployment rate has really stabilized."
That still-healthy labor market means the Fed likely won't feel pressure to rush more rate cuts to boost economic activity. Stahle told Business Insider after the jobs report was published earlier this month that "as long as the labor market is solid, it gives the Federal Reserve some time to work."
Inflation largely slowed in 2024 but closed out the year showing mixed signals, which may also give the Fed a reason to pause rate cuts. Overall CPI increased 2.9% over the year in December, higher than the 2.7% rate in November. Core CPI, which excludes volatile food and energy prices, increased 3.2% over the year in December, a slowdown from the 3.3% rate the previous three months.
"The Fed is going to need to see a succession of inflation data that would make them feel that the progress toward the 2% target has resumed," Greg McBride, the chief financial analyst for Bankrate, told BI after the release of CPI data earlier this month. "There isn't a whole lot to latch onto to feel that way at this point."
It's unclear how the Fed will act on interest rates over the course of the year, and Trump's trade plans could complicate the central bank's decision-making. The president has threatened tariffs on China, Mexico, Canada, Colombia, Russia, and the BRICS nations, and while he has so far used those threats as leverage to achieve policy goals, Trump indicated he is considering placing a 25% tariff on Canada and Mexico as soon as February 1.
Many economists have argued that large and broad tariff increases could fuel a new round of price increases.
The Fed's latest Summary of Economic Projections released in December penciled in two interest-rate cuts for 2025, but Powell said during a press conference that month that Trump's trade policies present too much uncertainty to clearly forecast what the Fed will do.
"We just don't know really very much at all about the actual policy, so it's very premature to try to make any kind of conclusion," Powell said in December. "We don't know what will be tariffed, from what countries, for how long, in what size. We don't know whether there'll be retaliatory tariffs. We don't know what the transmission of any of that will be into consumer prices."
