The US Federal Reserve has paused its rate cuts, waiting to see the effects of President Donald Trump's new policies on the labor market and inflation. In its first meeting of 2025, the Federal Open Market Committee (FOMC) held the federal funds rate unchanged at 4.25-4.50%, after cutting it by a quarter point each in December and November last year.

Fed Chairman Jerome Powell cited elevated uncertainty due to significant policy shifts in tariffs, immigration, fiscal policy, and regulatory policy. The committee is waiting to see what policies are enacted before making any changes to its policy stance.

Powell noted that the economy is strong, the labor market is solid, and the downside risks to the labor market have abated. The Fed had penciled in 50 basis points worth of cuts for 2025, down from 100 basis points projected in September.

Fed fund futures indicate a likelihood of only 50 basis points of rate cuts this year, with concerns over Trump's plans to hike tariffs, expel illegal immigrants, and cut taxes. Powell mentioned that businesses dependent on immigrant labor are finding it harder to get people, but this has not yet shown up in aggregate labor data.

Trump has been openly critical of the Fed, saying he wants a "say" in making monetary policy. Powell affirmed the Fed's independence, stating that they study the data, analyze the outlook, and use their tools accordingly.

The consumer price index (CPI) accelerated to an annual 2.9% in December, up from 2.4% in September. The Fed began a series of rate hikes in March 2022, taking the target rate from near zero to over five percentage points higher by July 2023, keeping it at 5.25-5.5% through August 2024.