The Federal Reserve held interest rates steady Wednesday, taking a measured, wait-and-see approach to the economy. Sometimes doing nothing is an act of defiance.
President Donald Trump has put the Fed and its chairman, Jerome Powell, under intense pressure to lower borrowing costs, despite concerns about inflation. By refusing to cut rates, the central bank’s leaders asserted their independence from the White House.
Wednesday’s move comes as Powell and the Fed face a criminal investigation launched by Trump’s close ally Jeanine Pirro, the U.S. attorney for the District of Columbia.
Powell has accused the White House of using the probe as a pretext to push the central bank to back Trump’s long-sought-after interest rate cuts.
At the same time, the future of the Fed’s independence hangs in the balance at the Supreme Court. Justices are weighing whether Trump exceeded his authority when he moved to fire Fed governor Lisa Cook last summer.
As Powell holds the line against the White House’s multi-pronged pressure campaign, Trump is actively preparing to unveil his successor. Powell’s term as chair ends in May, and Trump says he has whittled a list of potential nominees to just a few names.
So while there was little suspense around what the Fed would do with interest rates, there is still plenty of drama around the next few hours.
Interest rates
In its statement, the Fed said governors Waller and Stephen Miran, both appointed by Trump, dissented. Both governors were in favor of a 0.25% cut.
But with no changes to rates, investors were looking for any signs of Powell’s attitude toward cuts later this year.
After Powell's news conference, the futures market indicated that traders did not expect any cuts through the middle of the year.
A notable shift since the last Fed meeting could be found in the carefully crafted formal statement the central bank issued announcing its decision.
Recent Fed interest rate decision statements have noted specifically that “downside risks to employment rose in recent months.”
But in Wednesday’s release, that line was missing, suggesting the bank may believe the labor market has stabilized.
The statement also said the U.S. economy was growing at a "solid" pace. Recent ones have called the pace "moderate."
Experts are debating the degree to which the labor market has cooled.
In his post-announcement news conference, Powell said that while "consumer spending has been resilient," at the same time, "activity in the housing sector has remained weak."
Consumers are "trading down from brands, and they’re buying less and changing their buying habits and that kind of thing," he said.
Powell said that regional Federal Reserve banks have heard "a lot about affordability" lately and that they "take that very seriously."
"The best thing we can do for people who are feeling that squeeze is to keep inflation under control," he said, "and frankly to finish the job of getting inflation back down to 2%."
After having contracted by 173,000 jobs in October, the labor market added only 56,000 jobs in November and 50,000 in December.
But even with a generally weak pace of hiring, the unemployment rate fell to 4.4% in December, from 4.5% in November.
Inflation, meanwhile, remains well above the Fed’s 2% target, undermining the White House’s argument that the central bank needs to lower interest rates to turbocharge the economy.
After it rose to 3% in September, inflation declined to 2.7% in November and held steady in December. But many economists believe those numbers could be somewhat distorted by technical changes to how data was collected last fall, caused by the six-week federal government shutdown.
Powell said "a lot" of the tariffs that could have sparked inflation have already worked their way through the economy.
"That's actually good news," he said, "because if [the inflation] weren't from tariffs," it could signal other problems in the economy.
Power and politics
Outside of Wall Street, people were watching the meeting to see the latest episode of the political and legal drama between the Trump White House and the Fed’s independent governors.
On Jan. 11, Powell announced that the Fed had been served with “grand jury subpoenas, threatening a criminal indictment.”
The unprecedented public statement effectively fired a return shot at the White House, bringing Powell’s long-simmering tensions with the Trump administration to a head and out into the open.
It also rattled global markets, as investors wondered how far Trump would be willing to go to weaken Powell and the Fed
The criminal probe has its roots in a long-running renovation project at the Fed’s Washington headquarters. Trump and his allies have seized on the construction project to claim that it reflects Powell’s overall mismanagement of the Fed.
Powell insists that the project, while expensive, has been managed properly, and he has asked the Fed’s inspector general to review it. The initial renovation was approved by the Fed’s seven other board members before Powell became its chair.
Powell said Wednesday that he would not expand on his statement about the investigation. He also declined to say whether the Fed had responded to the subpoenas from the U.S. attorney.
About 20 blocks down from the Federal Reserve at the Supreme Court, justices heard oral arguments this month in the case lodged by Cook, the Fed governor whom Trump is seeking to fire, citing unproven accusations of “mortgage fraud.” Cook and her legal team have denied the allegations.
During the Jan. 21 hearing, several Supreme Court justices appeared skeptical of Trump’s stated justification for removing Cook from the board.
Both conservative and liberal justices also seemed sympathetic to the argument that Cook should have the right to challenge Trump’s decision, a notion the government’s attorney had rejected.
In an unusual show of solidarity with Cook, Powell attended the hearing in person.
Powell said he attended because the case "is perhaps the most important legal case in the Fed’s 113-year history.”
Asked about Treasury Secretary Scott Bessent, who said he should not have attended, Powell said he does not respond to the comments made by other officials.
However, he noted that former Fed chair Paul Volcker "went to a Supreme Court case” in the 1980s. “I thought it was an appropriate thing,” he added.
"It would be hard to restore the credibility of the institution if people lose their faith that we’re making decisions only on the basis of our assessment of what’s best for everyone," Powell said "rather than trying to benefit one group or another."
"We haven’t lost it," he said of the Fed's independence. "I don’t believe we will. I certainly hope we won’t, but it’s very important."
