Fed to hold rates steady and brace for Trump

Federal Reserve officials are expected to leave interest rates steady this week, giving themselves more time to lower inflation and to assess how President Donald Trump’s policies will affect the economy.

The break in rate cuts would come after three straight reductions since September that lowered the Fed’s benchmark rate by a full percentage point. Their target range is now 4.25% to 4.5%.

Several policymakers have said they expect fewer rate reductions this year following data showing the US economy is on sturdy ground and that inflation has been stickier than anticipated. December data for the Fed’s preferred inflation gauge, the personal consumption expenditures price index, is due Friday.

Still, after a string of surprising data and uncertainty over how the US economy might respond to an array of bold new policies from Trump on trade, taxation, immigration and regulation, officials are unlikely to commit to any particular rate path.

“They’re skipping a rate cut,” said Gregory Daco, chief economist for EY. “But they want to retain as much optionality as possible to adjust the fed funds rate further through the year.”

The Fed’s rate decision will be released at 2 p.m. in Washington on Wednesday and Fed Chair Jerome Powell will hold a post-meeting press conference 30 minutes later.

Future Adjustments

Fed watchers don’t expect the Federal Open Market Committee to make many changes to their post-meeting statement. The current wording referring to the “extent and timing of additional adjustments” already gives policymakers flexibility to change their approach, as needed, based on what happens with the economy, said Daco.

Powell will almost certainly be pressed by reporters over how he and his colleagues are factoring Trump’s policies and proposed plans into their outlooks for the economy. Fed officials are not due to release updated forecasts until their March policy meeting.

But minutes from the December gathering showed “a number” of participants included placeholder assumptions about Trump’s potential plans in their economic projections and “almost all participants” said the upside risks to inflation had increased.

According to Daco, investors also want to hear more from Powell on the so-called “neutral rate,” or the level at which the Fed is neither juicing nor cooling the economy. Officials have been raising their estimates for neutral over the past year. If many policymakers believe interest rates are near that point, it suggests not only a slower pace of reductions ahead, but fewer total cuts as well.