Fed Hold Rates Steady at 4.25% as Expected 

On Wednesday, the Federal Reserve decreased the benchmark policy rate by 25 basis points, which has reached a range of 4.25%-4.50%. The officials hinted at the possibility of a pause in further rate cuts next year as labor market conditions remained stable and the inflation trends showed stability. This hawkish tone gave the U.S. dollar a strong boost of over 1% to a two-year high. 

(U.S. Dollar Index Chart, Source: Trading View) 

Fed policymakers moved their long-run neutral rate estimates higher, lifted their 2025 inflation forecast significantly and outlined a plan for further rate cuts in the next year. But linking higher inflation expectations to further monetary easing proved a difficult juggling act for Fed Chairman Jerome Powell in his news conference. 

“When assessing the appropriate scope and timing of further adjustments to the target range, the Committee will closely monitor incoming data, the evolving economic outlook, and associated risks,” Powell said, adding language that is consistent with a likely pause in rate cuts beginning at the January 28–29 meeting. 

Moreover, since President-elect Trump would not be taking office until January 20, Fed officials also underscored that monetary policy cannot be based on campaign promises, which are still uncertain regarding their implementation. Given this scenario, the Fed staff probably has run different scenarios. Their forecasts are for economic growth above potential at 2.1% next year, inflation above target levels for the next two years, and unemployment rate below 4.3%. 

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