FOMC Holds Interest Rates Steady at The January Meeting

The FOMC met on January 28^th and 29^th to discuss updates to the economic situation and adjust the course of monetary policy. In a widely anticipated move, they held interest rates steady.

While the meeting didn’t bring a change to interest rates, the committee revealed valuable insights. We’ve summarized the information that is most likely to impact your business below.

FOMC Holds Interest Rates Steady

The FOMC voted to hold the Fed Funds Rate steady at a target range of 4.25 – 4.50%. This move followed three consecutive interest rate cuts in September, November, and December which lowered the Fed Funds Rate by a cumulative 1%.

The FOMC’s decision came as no surprise to those who have been following the markets. Prior to the meeting, a quick review of the CME Group’s FedWatch Tool showed a 97.9% probability of the Fed Funds Rate remaining unchanged.

Data That Drove the FOMC’s Decision

The Fed consistently states that their decisions are data dependent, so it’s important to review the latest economic figures to understand their motivations. New data on GDP, inflation, and labor markets have been released since the last meeting, and those figures were key points of consideration.

Economic Activity Expanded at A Solid Pace

Real Gross Domestic Product [GDP] rose at an annual rate of 3.1% in the third quarter of 2024 according to the latest data from the Bureau of Economic Analysis. The latest increase followed a 3.0% rise in the second quarter.

In the statement announcing the interest rate decision, the FOMC described the pace of economic activity as “solid.” The steady growth was one factor credited with contributing to their interest rate decision.

The latest projections from the FOMC – which were released in December – show an anticipated decline in GDP during 2025. Committee members forecast that GDP will slow to an annual growth rate of 2.1% by the end of the year.

Inflation Remains Elevated

The most recent Personal Income and Outlays report from the Bureau of Economic Analysis showed that the Personal Consumption Expenditures [PCE] inflation rate was 2.4% in November. The latest reading shows an increase of 0.1 percentage points from the prior month.

The FOMC has been attempting to reduce the inflation rate for over two years and bring it closer to their 2% target. Thus far, their efforts have been reasonably successful. However, prices have increased marginally in the last three reports. The FOMC simply stated that inflation “remains somewhat elevated” in the official statement.

Despite the monthly increase, the inflation rate is on track to match the FOMC’s most recent projections for 2025. The committee anticipates an end of year inflation rate of 2.5% – indicating a very slight rise from the current reading.

Unemployment Has Stabilized

The Bureau of Labor Statistics reported that the unemployment rate ticked down to 4.1% in December. This rate has vacillated in a narrow range from 4.0 to 4.2% since May 2024.

FOMC committee members wrote that the unemployment rate has “stabilized at a low level” in recent months. Their latest projections suggest that the unemployment rate will inch higher throughout the year with an anticipated end-of-year unemployment rate of 4.3%.

Expectations For Interest Rates

The FOMC’s December economic projections show an end of 2025 Fed Funds Rate of 3.9% – indicating a 0.5% decline throughout the year. These projections do not indicate the timing of the cuts.

To get clues as to the timing of the cuts, we reviewed the FedWatch tool, and it shows roughly a 30% chance of an interest rate cut at the March meeting. The probability of a rate cut rises for the following meetings and shows that a majority of traders anticipate a rate cut by the summer.

On the subject of future interest rate cuts, the FOMC reiterated that “the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.” In other words, the data will continue to drive their decisions.

Chair Powell also shared a similar outlook at the press conference following the interest rate announcement. He said that the Fed does not need to be in a hurry to adjust monetary policy because the inflation and unemployment risks are roughly in balance. He went on to say that a significant change in either the labor market or a rapid shift in prices could drive the Fed to either keep policy restrictive for longer or cut rates more quickly.

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