January 2025. What the latest move says about the economy

Federal Reserve officials are expected to leave interest rates steady when they emerge from their first policy meeting of the second Trump administration Tuesday. That would most likely frustrate President Donald Trump, who has sought to pressure the central bank to drive rates lower.

“I’ll demand that interest rates drop immediately,” Trump said in wide-ranging remarks at the World Economic Forum in Davos, Switzerland, via videoconference last week. “And likewise, they should be dropping all over the world. Interest rates should follow us all over.”

The remarks extended Trump’s habit of publicizing his views on monetary policy, which U.S. presidents have long avoided to maintain the Fed’s autonomy from politics.

“I know interest rates much better than they do,” he said in follow-up comments after his Davos address. He also renewed his criticism of Fed Chairman Jerome Powell, whom he appointed in 2017 and has promised not to remove before Powell’s term ends in May 2026.

The Fed is set to announce its interest rate decision at 2 p.m. ET Wednesday, followed by remarks by Powell around 2:30.

The U.S. economy is in vastly different shape from when Trump left office in January 2021, with the country still gripped by the Covid-19 pandemic and bitter disputes over lockdown measures to combat it.

After a pandemic-era run-up in prices that devastated many consumers’ finances, inflation has largely been tamed at 2.9% as of December, though it has hovered for months above the Fed’s 2% target rate. Unemployment edged down to 4.1% in December from 4.2% the month before after employers added over a quarter-million jobs, helping tamp down worries about a labor market that has remained sturdy even as it cools.

Consumer spending, meanwhile, has held steady despite households’ increasing focus on value. Gross domestic product — driven significantly by the consumption of goods and services — was shown in December to have grown by at least 3% for the second consecutive quarter.

Analysts see those metrics, taken together, as signs that the economy is still humming along despite the inflation fight’s difficult “last mile” and that it doesn’t need a fresh boost from the Fed just yet. It has penciled in two rate cuts this year, but Wall Street doesn’t expect the first to arrive Wednesday.

“There’s little doubt the Fed will keep rates as-is this week,” Elizabeth Renter, senior economist at NerdWallet, said in a statement. “While many households and businesses have felt the pressure of this high rate environment, the economy remains strong. Consumer spending has remained robust, and is credited with maintaining this economic strength.”

Fed officials have issued cuts for three consecutive meetings, whittling their benchmark rate from a 20-year high range of 5.25%-5.5% down to the current 4.25%-4.5%. But economists say the delicate dance of keeping borrowing costs elevated enough to tame price growth without pushing the economy into a recession has grown more complicated. That’s largely due to Trump’s economic agenda — particularly tariffs, with his first policy move on that front expected Saturday.

Fed policymakers are “in a particularly tricky situation” now, Renter said. “Talk of policies that carry additional inflationary risk carry more weight now that the new administration is in place and beginning work.”

As a result, the path for rate cuts this year is “uncertain,” said Joe Brusuelas, chief economist at the financial firm RSM.

“Federal Reserve officials won’t say it, but it’s clear that the central bank’s decisions this year will be shaped by the Trump administration’s policies on trade and immigration,” Brusuelas said in a note Tuesday. “These policies could lead to higher inflation, or, just as important, raise inflation expectations, which would put the Fed’s long-held 2% inflation target at risk.”