Dive Brief:

• The Federal Reserve held the benchmark interest rate steady Wednesday amid concerns that Trump administration plans for tariffs, deregulation, mass deportations and tax cuts may spur inflation in coming months.
• With economic growth steady and inflation persisting above their 2% target, policymakers in a unanimous decision kept the federal funds rate at a range between 4.25% and 4.5%. The pause by the policy-setting Federal Open Market Committee followed three consecutive cuts last year that reduced the main interest rate by a full percentage point. 
• “The economy is strong, the labor market solid,” Powell said at a press conference. “We think disinflation continues on a slow and sometimes bumpy path,” he said, adding “the broad sense of the committee actually is that we don’t need to be in a hurry to adjust our policy stance.”

Dive Insight:

Fed officials in recent weeks have flagged the risk of renewed price pressures and emphasized that, given the broad range of policy shifts under the Trump administration, they will alter monetary policy based on a careful reading of incoming data.

“We don’t know what will happen with tariffs, with immigration, with fiscal policy and with regulatory policy,” Powell said. “We need to let those policies be articulated before we can even begin to make a plausible assessment of what their implications for the economy will be,” he said.

Powell mentioned several times that Fed officials believe that monetary policy is currently well calibrated and in no need for a change.

“Policy is meaningfully less restrictive than it was before we began to cut” the federal funds rate in September, he said. “For that reason, you know, we’re going to be focusing on seeing real progress on inflation or some weakness in the labor market before we consider making adjustments.”

Recent data on economic growth and employment give policymakers no reason to trim borrowing costs.

Gross domestic product probably expanded at a 2.3% annual rate during the fourth quarter, the Atlanta Fed said Wednesday. For the year, GDP increased 2.8%, according to a forecast by EY, and will probably expand 2.2% this year.

U.S. employers increased payrolls far beyond expectations last month. The unemployment rate eased to 4.1% from 4.2% as the economy added 256,000 jobs, logging average three-month payroll growth of 170,000, according to the Labor Department.

Meanwhile, inflation has gradually slowed during the past several months. The core consumer price index excluding volatile food and energy prices edged up 0.2% in December compared with 0.3% the prior month, according to the Bureau of Labor Statistics.

Consumer expectations that inflation will speed up have recently flashed warning signs, given that such sentiments can become self-fulfilling.

Average 12-month expectations for inflation increased 0.2 percentage points this month to 5.3%, “likely reflecting stickier inflation in recent months,” the Conference Board said Tuesday.

The report tracked a finding by the University of Michigan, which said recently that inflation expectations in January hit the highest level since May.

Expectations for inflation a year in advance surged to 3.3% this month from 2.8% in December, exceeding the 2.3% to 3% range during the two years prior to the pandemic, according to Joanne Hsu, director of the University of Michigan’s consumer survey.

“Concerns over the future trajectory of inflation were visible throughout the interviews and were tied to beliefs about anticipated policies like tariffs,” Hsu said in a statement. “Consumers continued to spontaneously express motives for buying-in-advance to avoid future price increases, and robust auto and retail sales data suggest that consumers are indeed acting on these views,” Hsu said.

Powell downplayed the rise in short-term inflation expectations, saying that consumer sentiments about long-term price trends are stable and more important to policymakers.

“You see expectations moving up a little bit at the short end but not in the long run, which is where it really matters,” Powell said, adding that President Donald Trump’s policy proposals may have pushed up short-term expectations.

Trump has repeatedly said in recent months that he plans to comment on monetary policy, breaking from a precedent of non-interference set by President Joe Biden and many of his predecessors.

Once he meets his goal of reducing oil prices and, in turn, slowing inflation, Trump said on Thursday that he would “demand that interest rates drop immediately.”

“And, likewise, they should be dropping all over the world,” Trump said in a televised speech to the World Economic Forum in Davos, Switzerland. “Interest rates should follow us.”

Powell declined to comment on Trump’s speech, and said he has not had recent contact with the president.

“I’m not going to have any response or comment whatsoever on what the president said,” Powell said. “It’s not appropriate for me to do so.”

Fed officials in a median projection last month signaled that they expect to make two, quarter-point cuts to the benchmark interest rate in 2025. They forecast that they will trim the federal funds rate to 3.9% by the end of this year and to 2.9% by the end of 2026.

Since then central bank officials have voiced concern about price pressures and expressed caution about the extent of rate cuts this year.

“Regarding potential policy changes under the new administration, recent Fed communications confirmed that most Fed policymakers see increased upside risks to inflation from deregulation, immigration restrictions, tariffs and tax cuts,” EY Chief Economist Gregory Daco said in an email.

Editor’s note: This story has been updated with Powell’s comments from the press conference.