By leaving the policy rate unchanged and Chair Powell explicitly mentioning the Fed is waiting to see the details of new policies, the FOMC signaled readiness to remain patient to assess the impact of changes in the policy landscape on the economic outlook. The latest Fed communication reaffirms our expectations that the central bank will stay on hold throughout H1 2025.

Figure 1. Fed leaves rates unchanged in January 2025

Sources: Federal Reserve Board and The Conference Board projections (light blue line) and approximations for Fed policy path (red line).

Trusted Insights for What’s Ahead^®

• We expect the Fed to stay on hold throughout H1 2025 and resume cuts in the latter half of this year as growth slows closer to potential and inflation returns to its downward trajectory.
• The Fed is unlikely to reach the long-run neutral rate target range of 3.00-3.25% until Q2 2026. We project the Fed will cut rates by 25bp at the July, September, and December meetings.
• The magnitude of individual actions and the pacing of future rate cuts could be altered by the realization of either upside or downside risks to the economy.
• Significant policy changes, namely intensification of trade wars, immigration and fiscal policy, could substantially alter growth, inflation, and labor market forecasts. This might lead the Fed to be more judicious and pause for longer to assess the effect of its actions.
• Much cooler inflation or material weakness in growth or the labor market might cause the Fed to cut rates in larger increments per meeting, accelerating the journey to neutral.

FOMC Meeting Highlights

Chair Powell in No Hurry to Cut

Chair Powell dismissed what markets viewed as a slightly hawkish tilt in the policy statement referring to them as just a “language clean-up.” The Fed dropped the reference to inflation making “progress toward the Committee’s 2 percent objective” and upgraded the description of the labor market to “solid” instead of having “eased”.

By leaving the language on “considering the extent and timing of additional adjustments to the target range for the federal funds rate” in the statement, the Fed retained ample flexibility with respect to the next policy move. This will allow them to react to a range of policy scenarios.

Chair Powell said the policymakers don’t want to be “in a hurry” to adjust the policy stance. Yet, he reiterated that “we are meaningfully above neutral” in terms of the level of policy rates, which continues to support our expectation for a resumption of rate cuts later in the year when the policy fog clears.

In Waiting Mode

The Chair noted that the range of possible scenarios with respect to policy outcomes is just “very wide” for the Fed to come up with any meaningful forecast for the near-term outlook and thus policy projections. The details of any potential changes to tariff, immigration and tax policy matter in terms of the size, timing and sequence.

Until there is some clarity, we anticipate the Fed will stay on pause, barring any significant deviation from the recent economic trajectory – whether it is with respect to inflation or the state of the labor market. Powell noted that the good state the economy is in right now reduces the level of uncertainty with respect to unknown policy outcomes.

Source: "Measuring Economic Policy Uncertainty". (2012). Scott R. Baker, Nicholas Bloom and Steve Davis, The Conference Board, 2025

Dual Mandate Risks

While in waiting mode, it remains our view that the Fed will not hesitate to act if significant risks with respect to its dual policy mandates materialize. While Powell reiterated that inflation expectations remain well-anchored, imposition of tariffs and the way they are potentially introduced could de-anchor inflation expectations and lead the Fed to pause for a longer period of time.

Conversely, significant deterioration in the labor market may lead to faster reduction in policy rates. In this respect, Powell mentioned the low level of the hiring rate at least a couple of times during the press conference. So far, the low hiring rate has not translated into higher layoffs, but this is the risk the Fed is watching very closely. Labor market data suggests that these developments remain risks rather than likely outcomes, supporting our expectations for a months-long pause.

Sources: BLS, Haver Analytics, The Conference Board, 2025