What To Expect From The Federal Reserve’s Interest Rate Decision Next Week

The Federal Reserve is widely expected to hold its key interest rate steady Wednesday as officials wait for more data that indicates inflation is cooling.

Financial markets are pricing in near certainty that the Fed will keep the fed funds rate at a range of 4.25% to 4.50% when the Fed’s policy committee meets Wednesday, according to the CME Group’s FedWatch tool. The tool forecasts rate movements based on fed funds futures trading data.

It would be the first Fed meeting since September in which the central bank has declined to cut interest rates.

Why Would the Federal Reserve Hold Interest Rates?

The central bank is entering a holding pattern in its battle against inflation.

Until September, the Fed had held its key interest rate at a two-decade high, pushing up borrowing costs for all kinds of loans. Central bankers attempted to deter borrowing and spending and allow supply and demand to rebalance, stifling the post-pandemic burst of high inflation.

Fed officials began cutting the rate this fall because inflation looked to be on a steady downward trajectory toward the Fed’s goal of a 2% annual rate. Not only that, but the labor market was showing signs of weakness. That pushed the Fed to lower interest rates to stimulate the economy and stave off a severe increase in unemployment.

The Fed is tasked with the balancing act of using monetary policy to keep the economy hot enough that everyone has a job but not so hot that inflation spikes. Eventually, the Fed aims to reduce its interest rate to a “neutral” level where borrowing costs are neither hold back the economy nor artificially boost it.

Since the autumn, inflation has stubbornly remained higher than 2%, and the labor market has stayed resilient, with employers resisting the kind of mass layoffs that would alarm Fed officials. Both of those trends have reduced the Fed’s appetite for rate cuts. In recent public comments, Fed officials emphasized they would remain patient and cut rates when inflation showed more signs of progress.

What’s Trump Got To Do With the Federal Reserve?

Not only that, but Fed officials are wary that newly inaugurated President Donald Trump’s economic tax cuts and tariffs policies could stoke inflation. That would pressure central bankers to keep rates higher for longer.

“With the economy solid, labor market stabilizing, and inflation remaining somewhat sticky, we anticipate the Fed will keep rates steady next week and maintain their ‘gradual /careful’ approach to reach the neutral rate, barring significant labor market weakness,” researchers at Deutsche Bank wrote in a commentary. “Uncertainty about upcoming policy changes from the Trump administration add to these reasons for caution.”