Fed holds rates steady as Powell cites improved economy, tariff inflation

Fed holds rates steady as Powell points to an improving economy

The Federal Reserve on Wednesday held its key interest rate steady, leaving the policy rate at about 3.6% and pausing further cuts even as President Donald Trump continued to press for lower borrowing costs. Chair Jerome Powell, speaking at a news conference after the decision, said the Fed’s outlook “has clearly improved since the last meeting” in December and argued that stronger conditions should support hiring over time. The central bank also said there were signs the job market is stabilizing.

Powell’s comments came as Fed officials weighed two competing forces inside the policy debate: improving economic momentum on one side, and concern that inflation is still too high on the other. With the economy growing at a healthy pace and the unemployment rate appearing to level off, officials “likely” saw less urgency to cut rates further immediately. Still, many policymakers wanted evidence that inflation—described by the Fed as stubbornly elevated—was moving closer to the Fed’s 2% target.

In explaining the Fed’s restraint, the central bank noted inflation at 2.8% in November, using the Fed’s preferred measure, which was slightly higher than a year earlier. With that backdrop, the Fed left open a path for additional easing this year while signaling it would be guided by how quickly inflation begins to cool. Michael Gapen, chief U.S. economist at Morgan Stanley, said Powell kept the door open for further cuts “when they get enough evidence inflation is decelerating.”

The decision also reflected sensitivity to tariffs and their impact on prices. Powell suggested that the effect of tariffs on goods—such as furniture, appliances and toys—will peak in the middle of this year, after which inflation is expected to fall. Powell told reporters that “a lot of it has” already shown up in prices and added that the Fed generally views import taxes as a one-time price increase. He said the “expectation is that we will see the effects of tariffs flowing through goods prices peaking and then starting to come down,” assuming there are no major new tariff increases.

Beyond monetary policy, Powell faced questions about the Fed’s independence and multiple legal and political flashpoints that have shaped the central bank’s second-term environment. In previous remarks, Powell said Jan. 11 that the Fed had received subpoenas from the Justice Department as part of a criminal investigation tied to his congressional testimony about a $2.5 billion building renovation, describing the subpoenas as a pretext to punish the Fed for not cutting rates quickly. On Wednesday, Powell did not add new details beyond his earlier statement.

Two governors dissented from the Fed’s decision. Governors Stephen Miran and Christopher Waller voted against holding rates unchanged, preferring an additional quarter-point reduction. Miran was appointed by Trump in September and had dissented at the three previous meetings as well, voting for a half-point cut. Waller is under consideration by the White House to replace Powell once Powell’s term ends in May.

Powell was also asked about the legal fight over Gov. Lisa Cook, including the Supreme Court’s decision to take up Trump’s attempt from last year to fire her over allegations of mortgage fraud that Cook denies. No U.S. president has fired a Fed governor in the central bank’s 112-year history. At an oral argument last week, justices appeared to be leaning toward allowing Cook to remain on the job until the case is resolved. Powell said he planned to attend the Supreme Court hearing because, in his view, it was “perhaps the most important legal case” in the Fed’s history and that he expected it would be “hard to explain why I didn’t attend.”

On the broader political pressure around the Fed’s leadership, Trump has suggested he is close to naming a new Fed chair to replace Powell. The announcement could come as soon as this week, though it has been delayed before, and Powell said he had not made a decision about whether he would remain as a Fed governor beyond May. Economists said the effort to pressure the central bank may have backfired with some support for Powell among Senate Republicans, who have threatened to block a replacement chair.

At the same time, Powell offered a warning to a potential successor about mixing monetary policy with politics. Asked if he had advice for whoever comes next, Powell said, “Don’t get involved in elected politics,” and added, “Don’t do it.” As for the immediate outlook for rates, Wall Street expected the Fed to hold steady at least until June.

The vote on rate decisions on Wednesday involved 12 of the 19 members of the Fed’s rate-setting committee, including all seven board governors, the New York Fed president, and four rotating regional bank presidents. The governors voting this year include Beth Hammack of the Cleveland Fed, Neel Kashkari of the Minneapolis Fed, Lorie Logan of the Dallas Fed and Anna Paulson of the Philadelphia Fed. The Fed’s current assessments also drew attention from labor-market and consumer sentiment measures: the Conference Board’s measure of consumer confidence dropped to an 11-year low in January, according to a business research group report cited in the Fed coverage. Powell acknowledged that surveys may show pessimism while also saying consumers are still spending at a healthy pace and that the economy “has once again surprised us with its strength,” with “consumer spending… overall numbers” described as good.