The US Federal Reserve kept interest rates steady after its January 28-29 meeting that concluded today, marking the first pause in the rate-cutting cycle that began in September 2024. After cutting the benchmark interest rate a full percentage point last year, the Fed kept it in the current 4.25-4.50 percent range.
“Recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated,” said the Fed in its latest statement.
The move was widely expected by investors following President Donald Trump’s inauguration. Trump’s second term is likely to shape the economy this year, particularly following his demands that the Fed continue lowering borrowing costs.
Trump has already raised economic concerns by calling for restricting immigration and raising import taxes, and on Thursday told global business leaders he would call on the Federal Reserve to cut interest rates. “I’ll demand that interest rates drop immediately, and likewise they should be dropping all over the world,” he said at the World Economic Forum Annual Meeting in Switzerland last week.
CBUAE maintains base rate
Shortly after the Fed held interest rates steady, the Central Bank of the UAE (CBUAE) decided to maintain the Base Rate applicable to the Overnight Deposit Facility (ODF) at 4.40 percent.
“The CBUAE has also decided to maintain the interest rate applicable to borrowing short-term liquidity from the CBUAE at 50 basis points above the Base Rate for all standing credit facilities,” the central bank said in its latest statement.
Last month, the central bank decided to cut the Base Rate applicable to the ODF by 25 basis points, from 4.65 percent to 4.40 percent. The CBUAE also decided to maintain the interest rate applicable to borrowing short-term liquidity from the CBUAE at 50 basis points above the Base Rate for all standing credit facilities.
U.S. central bank to lower borrowing costs twice this year
Since the Federal Reserve’s December meeting, data has maintained the core view among Fed officials that inflation will continue to move steadily towards the 2 percent target, with a low unemployment rate and continued hiring and economic growth. Projections issued at the end of the policy meeting last month showed Fed officials anticipated two quarter-percentage- point rate cuts this year, “if the data came in about as expected.”
The market is also pricing in the possibility that the Federal Reserve will cut interest rates twice by the end of this year amid signs of inflationary pressures following Trump’s inauguration.
The U.S. central bank cut its benchmark policy rate by a full percentage point over its final three meetings of 2024, but officials agreed at their December meeting that they were “at or near the point at which it would be appropriate to slow the pace of policy easing,” according to minutes of the session.
Trump’s policies will most likely influence the Federal Reserve’s interest rate policy decisions this year. The central bank has managed to decrease inflation to around its 2 percent target following its surge to a 40-year high in 2022.
According to the CME FedWatch Tool, traders were pricing only a 0.5 percent chance that the Fed will cut interest rates to the 4.00-4.25 percent range this week. These bets rorse to 38.1 percent for the March meeting and 45.8 percent for the Fed’s May meeting.
Inflation moves steadily towards 2 percent target
The latest data showed that U.S. producer prices increased moderately in December. The U.S. Bureau of Labor Statistics reported that the producer price index, which measures wholesale inflation, rose 0.2 percent in December and the core gauge remained flat during the month. This came on the back of the upbeat U.S. monthly jobs report. However, this data is unlikely to change views that the Fed would not cut interest rates again before the second half of this year amid labor market resilience.
Easing underlying inflation in the U.S. renewed hopes of a less restrictive Federal Reserve interest rate policy this year. Core inflation unexpectedly slowed, while headline consumer prices showed no significant upside surprises. The U.S. Bureau of Labor Statistics reported that the headline CPI rose 0.4 percent in December and the yearly rate accelerated to 2.9 percent from 2.7 percent in the previous month. Meanwhile, core inflation, which excludes volatile food and energy prices, rose 3.2 percent year-on-year compared to the 3.3 percent increase in November.
Read: How many times will US Fed cut rates in 2025?
Trump’s policies raise inflation concerns
Since being sworn in as president for a second time on January 20, Trump has signed several executive orders, including one on Monday that pauses some federal spending, a potential fiscal shock to consumption and growth. A federal judge on Tuesday halted the spending freeze until at least next Monday, pending a further legal review.
Trump also has raised deportation of immigrants and threatened 25 percent import tariffs on goods from Mexico and Canada as soon as Saturday. Economists see these moves as more likely to aggravate inflation than contribute to cooling it further.
Trump had previously proposed tariffs of up to 10 percent on global imports, 60 percent on Chinese goods, and a 25 percent import tariff increase on Canadian and Mexican products. He also vowed to hit the European Union with tariffs and said his administration was discussing a 10 percent tariff on goods imported from China starting February 1.
In addition, the U.S. and Colombia pulled back from the verge of a trade war after the White House said on Monday that the country had agreed to accept military aircraft carrying deported migrants.
Trump had previously ordered his Administration to introduce emergency 25 percent tariffs on all goods coming from Colombia after the Colombian government refused to allow two U.S. military planes carrying deported migrants to land in the country. Trump also warned that tariffs would increase to 50 percent by next week if the Latin American country refused to comply with his immigration policies, fueling trade war fears and tempering investors’ appetite for riskier assets.
