After three straight cuts, the central bank makes its first move of the year
After making three straight rate cuts to end 2025, the Federal Reserve put the brakes on further cuts during Wednesday’s meeting of the Federal Open Market Committee (FOMC).
The Fed announced it was keeping its funds rate steady, deciding against a fourth straight cut. The federal funds rate currently sits between 3.50% and 3.75%.
Economists largely expected the hold for several reasons. Sam Williamson, senior economist at First American, told Mortgage Professional America that the central bank was likely to pause to see the full impact of the three straight cuts.
“A pause would give policymakers time to assess how those cuts are filtering through the economy and allow more time for shutdown‑related data distortions to clear,” Williamson said.
Data clarity remains an ongoing issue, as much of the official reporting data at the end of the year was either paused or canceled due to the government shutdown. With another shutdown looming this weekend, it is unclear what impact that may have on data over the next few months.
Williamson is hopeful that the data will return to normal soon so that the central bank will have a clearer picture of the jobs and inflation data, the two mandates the Fed is trying to keep in balance.
“Clarity should gradually return over the next few months as shutdown-related disruptions and technical distortions fade,” Williamson said. “Still, January (was) likely too early for policymakers to put full weight on the latest readings, supporting a cautious ’wait-and-see’ stance at (Wednesday’s) meeting.
“By March, the Fed should have several months of cleaner inflation and jobs data in hand, giving the committee more confidence on whether recent trends are signal or noise. If that cleaner data confirms continued disinflation alongside a cooling labor market, it will strengthen the case for resuming gradual cuts and continuing the move back toward neutral.”
When will the Fed cut again?
The question everyone wants to know is when the Fed will cut rates again. Fed chair Jerome Powell should give some indication of when that might happen during his public comments at 2:30 p.m. today.
Williamson said he thinks whether the Fed will cut in March or not will depend on how soft the labor market looks before the next rate decision is announced on March 18.
“With the unemployment rate showing recent signs of stabilization—and with widening divisions within the committee over how quickly to move rates back toward neutral—the Fed likely (didn’t) have a strong case for a fourth straight cut,” Williamson said. “That said, a March cut remains a possibility, especially if labor market conditions soften meaningfully over the remainder of the first quarter.”
However, some economists wonder whether the Fed will keep rates unchanged until Powell’s term as chair ends in May. That would allow the new Fed chair to come in, assess the situation for themselves, and plot a course forward.
Before Wednesday’s rate announcement, CME FedWatch, which tracks the probabilities of changes to the Fed rate based on the 30-day Fed Funds futures prices, predicted the central bank would hold rates until June 17. It had an 82.2% chance of holding in March and a 68.6% chance of holding in April.
When will the new chair be announced?
The other major question looming over this Fed meeting is when President Donald Trump will announce his choice for the new Federal Reserve chair.
Some reports thought the announcement might come in December. Later, it was expected in early January. Now, as February approaches, the announcement has to come sooner rather than later.
That is because there is only one guaranteed seat on the Fed board before Powell’s term ends, currently held by Stephen Miran. The term Miran assumed ends on January 31. However, the law allows for Miran to continue serving on the Fed until a replacement is chosen.
Kenneth Katkin, law professor at Northern Kentucky University’s Chase College of Law, said traditionally the Fed chair departs after the chair term ends. However, because of the ongoing Department of Justice investigation into Powell, Katkin thinks Powell may be forced to remain on the board instead until his overall term ends in January 2028.
“It would be typical for most chairs to actually resign from being a governor when their chairmanship ends,” Katkin told Mortgage Professional America. “That's what they usually do, even though they're not required to do that. I think Trump actually just made that impossible. He probably has to stay on and not resign because he doesn't want to look like he was pushed out, or like he had to leave because he's actually a criminal.
“I think it makes it necessary for him to stay, so it seems very counterproductive to me. If Trump wanted to get rid of him, probably the best thing to do would have been just to be nice to him and compliment him for doing such a good job. He probably would have just resigned in May, but I think he's likely to stay on the Fed for longer than that now.”
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