Fed Maintains Interest Rates as Economic Outlook Brightens

• Two Trump-appointed governors (Miran and Waller) dissented, voting for another quarter-point cut rather than holding rates steady
• The Fed removed language indicating higher risk to the labor market than inflation, signaling a more balanced view of its dual mandate and a more patient policy approach
• Economic growth has been robust (Q3 at 4.4%, Q4 tracking at 5.4%), but inflation remains near 3%, well above the Fed's 2% goal, with markets pricing in at most two rate cuts in 2026

Federal Reserve Holds Interest Rates Steady Amid Improved Economic Outlook

Key Decision:

The Federal Reserve held its benchmark interest rate unchanged at 3.5%-3.75%, pausing after three consecutive quarter-point cuts. The decision met market expectations and signals a more cautious approach to monetary policy.

Economic Assessment:

The FOMC upgraded its economic growth outlook, noting activity is "expanding at a solid pace." Q3 GDP grew 4.4%, with Q4 tracking at 5.4% according to Atlanta Fed estimates. The committee also removed language suggesting greater concern about labor market weakness versus inflation, indicating its dual mandate goals are more balanced.

Labor Market & Inflation:

Job gains remain modest with unemployment showing stabilization signs. Initial jobless claims are at two-year lows despite slow hiring amid immigration crackdowns. Inflation persists near 3%, above the Fed's 2% target, with Trump's tariffs adding near-term pressure expected to ease later in 2026.

Political Context:

Chair Jerome Powell faces mounting pressure with only two meetings remaining before his term ends. The Justice Department subpoenaed Powell over Fed headquarters renovations, while President Trump has repeatedly threatened to fire him and moved to remove Governor Lisa Cook. Two Trump appointees—Governors Stephen Miran and Christopher Waller—dissented, favoring another rate cut.

Market Outlook:

The Fed provided minimal forward guidance, with markets not expecting rate adjustments until at least June. Futures markets price in at most two rate cuts in 2026 and none in 2027. BlackRock's Rick Rieder is the predicted favorite to succeed Powell as Fed Chair.

The decision reflects the Fed's attempt to balance economic strength against persistent inflation while navigating unprecedented political interference.