Topline
The Federal Reserve voted Wednesday to pause interest rate cuts, with several policymakers and economists forecasting further cuts later this year—as concerns spread in recent weeks about the central bank’s independence from the Trump administration.
Some Fed officials have forecast interest rate cuts later this year, but not in January.
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Key Facts
The Federal Open Market Committee voted 10-2 in favor of holding interest rates between 3.5% and 3.75%.
Fed governors Stephen Miran and Christopher Waller dissented in favor of lowering interest rates by a quarter point to between 3.25% and 3.5%.
In a statement, the FOMC indicated concerns about the labor market had eased among policymakers, writing, “Available indicators suggest that economic activity has been expanding at a solid pace” and that the unemployment rate had “shown some signs of stabilization.”
What Did Fed Officials Say About Lowering Rates?
Kansas City Fed President Jeff Schmid said earlier this month that it would be best to hold the Fed’s benchmark rate, as policymakers aim to lower inflation to 2%, adding his “preference would be to keep monetary policy modestly restrictive.” Chicago Fed President Austan Goolsbee, who dissented last month in the FOMC’s vote to lower interest rates alongside Schmid, appeared to indicate he would vote to hold rates as is again, telling CNBC, “The most important thing facing us is we’ve got to get inflation back to 2%.” Philadelphia Fed President Anna Paulson told The Wall Street Journal she was comfortable holding rates steady, also adding she believed a restrictive monetary policy would be “playing a role” in lowering inflation. San Francisco Fed President Mary Daly pointed to a “stabilizing” labor market and that monetary policy is in a “good place to respond to however the economy evolves.”
Will The Fed Lower Interest Rates This Year?
The Fed’s “dot plot,” a graph that outlines the central bank’s policymaking expectations, indicated last month that just one quarter-point interest rate cut is expected in 2026, followed by one more in 2027, when the funds rate is projected to hit a targeted rate of 3% to 3.25%. The Fed’s December statement was tweaked to note that it would consider the “extent and timing of additional adjustments” to rates, mirroring language last used by the central bank in December 2024, after which the FOMC opted not to approve cuts until September 2025. Paulson signaled some support for more cuts later this year, suggesting “some modest further adjustments to the funds rate” would “likely be appropriate later in the year.” Traders have priced in odds of 17.4% of interest rates lowering by a quarter point in March, 28.1% in April and 46.8% in June, when odds of a half-point reduction have increased to 14.7%.
When Will Trump Replace Jerome Powell?
During a rally in Des Moines, Iowa, President Donald Trump said he would announce his nominee to succeed Powell “pretty soon.” Trump, who has criticized Powell for not lowering interest rates more quickly, added, “When we have a great Fed chairman … you’ll see rates come down a lot.” Powell’s term as Fed chair ends in May, though he could still serve as a governor and participate in FOMC decisions unless he steps down entirely. Wolfe Research’s chief economist Stephanie Roth wrote in a note the “single most likely window” for Trump to announce Powell’s success is around the FOMC’s January meeting, noting, “More broadly, the decision could come as soon as this week, or within the next couple of weeks.”
Who Could Replace Jerome Powell?
Trump suggested to CNBC last week he had one candidate in mind to replace Powell, adding the list of candidates was “down to two.” Among the possible finalists are former Fed Governor Kevin Warsh, current Fed Governor Christopher Waller, National Economic Council chief Kevin Hassett and BlackRock executive Rick Rieder. Rieder has emerged as the betting favorite in recent days, with Polymarket pricing in 40% odds of Rieder being Trump’s nominee, followed by Warsh (31%) and Waller (8%). Hassett was previously viewed as the favorite, though Trump signaled earlier this month he wanted to “keep [him] where [he is].”
Key Background
The Federal Reserve has defied Trump’s demands for interest rates to be lowered, despite three consecutive votes to do so. Trump last month argued the Fed’s move to lower interest rates by a quarter-point could have been “at least doubled” and added to his criticism of Powell, calling the Fed chair a “siff” and a “dead head” who approved a “rather small cut.” Earlier this month, Powell said the Justice Department served the Fed grand jury subpoenas threatening a criminal indictment over Powell’s testimony before the Senate Banking Committee last year. Powell, who was appointed by Trump in 2018, called the move an “unprecedented action” that should be viewed “in the broader context of the administration’s threats and ongoing pressure.” Several economists and former Fed officials condemned the investigation, arguing it was an “unprecedented attempt” to undermine the central bank’s independence. The White House said earlier this month that Trump supports the Fed’s political independence, adding, “He has said that many times.”