The Federal Reserve, under pressure from Donald Trump to cut interest rates, has resisted his calls and instead voted to keep borrowing costs steady, indicating that rates could remain elevated for the foreseeable future. This development comes despite former President Donald Trump’s public demand last week for an immediate rate drop.
In its first policy meeting since Donald Trump’s comeback to office, the Fed left interest rates untouched at 4.5 percent. It now puts on pause a three-quarters-of-a-percent cut cycle set in place a few months back that lowered it from its historic peak of 5.5 percent.
Recently, Trump repeated the same at the World Economic Forum in Davos. He said that the Fed, along with central banks globally, should lower borrowing costs. However, the latest decision of the Fed tells a different story about its stance on monetary policy independence even if it faces pressure from the politicians.
Economic indicators suggest that inflation remains a concern, with the Fed no longer stating that it has made progress toward its 2% target. Powell emphasized that the change in language was “not meant to send a signal” about future policy moves but maintained that there was no urgency to adjust the current stance.
The decision to hold rates high likely would have an impact on the consumer side, where borrowing costs remain high and drive everything in between mortgage payments and credit card interest.
Financial analysts believe that this move shows caution on the part of the central bank as it deals with persistent inflation and resilient economic growth. According to Matthew Morgan, head of fixed income at Jupiter Asset Management, “While the Fed is increasingly worried about data pointing to sticky inflation and resilient US growth, as we head through 2025, investors will need to be vigilant for the impact that ‘higher for longer’ could have on the economy.
Markets responded quickly; US stocks felt the pinch right after the Fed’s announcement. The Nasdaq Composite, laden with tech companies, fell by 0.6%, and the S&P 500 was down by 0.4%. Meanwhile, US Treasury yields edged higher as investors adjusted expectations about the future rate cuts pace.
Clearly ahead of this, Trump said he wanted immediate cuts in borrowing costs. In his speech at Davos, he quipped, “I ask to have interest rates dropped immediately. And similarly, they should be dropping around the world.” But just hours after this, Powell said he had “not had any contact” with Trump about monetary policy. Powell was pointed when answering questions about how much influence politics has on Fed’s policy saying, “Don’t look for us to do anything else.”
The broader economic landscape remains uncertain with Trump’s trade policies and potential mass deportation plans adding further unpredictability. Powell acknowledged this uncertainty but stressed that it was too early to determine their impact on inflation. “We need to let those policies be articulated before we can begin to make a plausible assessment,” he explained. He also avoided reacting to the planned tariff implementations as he said, “I do not want even indirectly comment on the conduct of tariffs.”
Trade tensions are one of the main factors that will shape the current economic outlook. Trump has threatened to impose 25% tariffs on Canada and Mexico if they fail to secure their borders, with the policy possibly taking effect as soon as Saturday. A similar tariff was briefly imposed on Colombia last weekend during a diplomatic dispute but was quickly reversed.
Powell’s tenure at the Fed has been an issue during most of Trump’s presidency. Powell was originally appointed by Trump during his first term and later reappointed by Joe Biden. However, Trump has announced that he would not extend Powell’s term if his term allowed for it. Last year, Trump hinted that Powell might manipulate interest rates for political purposes, arguing that the Fed chairman would cut rates ahead of elections to benefit Democrats. Nevertheless, in December, Trump said he had no intention of replacing Powell immediately. Legal scholars argue that Trump has no authority to fire the Fed chairman on his own.
Trump has also boasted of his knowledge of interest rates, saying in the past, “I know interest rates much better than they [the Federal Reserve] do, and I think I know it certainly much better than the one who’s primarily in charge of making the decision.”
As Trump continues to call for rate cuts, critics say that the Fed’s reluctance to lower borrowing costs could have serious economic implications. Democratic Senator Elizabeth Warren said, “With his decision today, Chair Powell is putting Americans’ jobs at risk and making it more difficult for families across the country to afford a home or pay off their credit card bill.” She continued to question the Fed to reduce its rates and challenge President Trump to act with measures that can reduce costs.
Economic and political pressure seems to grow daily, yet the Fed clings to the dogma of decisions based strictly on data. Will Trump’s plea for lower rates sway policy makers in the near future, but for now, the central bank seems firmly planted in this strategy, as the need for stability is preferred to political whim.