Fed chief Powell's candid words revamp interest rate cut bets

The Federal Reserve’s interest-rate-policy panel, the Federal Open Market Committee, meets eight times a year, and before each confab, just about everyone weighs in about what to expect. 

The big question always is: Will the Fed change interest rates? When and, if so, by how much? 

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The FOMC indeed held a two-day meeting, which ended Wednesday, leaving the key Federal Funds Rate at 4.25% to 4.5%. 

Before the Fed meeting, the financial market participants saw the decision coming: no change. 

Fed officials reset inflation expectations

But there was a noticeable omission in the Fed statement. It made no mention of whether the FOMC still saw inflation falling. Instead, the statement said only that inflation “remains somewhat elevated.”

Related: Analyst predicts stocks likely to join the S&P 500 in 2025

Many Fed observers took that to mean the central bank is more worried about inflation than it had been before. 

The no-change decision has consequences, including: 

• Short-term rates will remain at current levels, although these are probably sufficient to meet business and government capital needs.
• Longer-term rates will remain higher, meaning expanding a business might be more costly and some businesses might delay growth proposals.
• You won’t see the Fed cutting rates until June at the earliest, and chances are good you won’t see one then either. There probably will be one in the fall, possibly in October.

Mortgage rates stay high, frustrate housing market

All this means that the rate on a 30-year mortgage will probably stay right around 7% this year. 

So buying a home will continue to be constrained by the triple whammy of: 

• Higher mortgage rates.
• Limited inventories of homes for sale because those who bought homes in 2020, 2021 and early 2022 still have very low-rate mortgages and don’t want to move or can’t afford to move.
• High home prices.

With a 7% mortgage, the monthly principal and interest payment on a $250,000 mortgage comes to $1,666 — plus taxes and insurance. 

Related: Analyst predicts stocks likely to join the S&P 500 in 2025

In early September 2024, the rate on a 30-year mortgage loan had dropped to as low as 6.2%, producing a monthly P&I payment of $1,531. 

That rate came as the Fed prepared to cut the Federal Funds Rate for the first time since summer 2023. But when the decision came down on Sept. 18, long-term rates, including mortgage rates, rose. 

Home sales boost the economy because buyers usually spend several thousand dollars, sometimes much more, to redecorate and buy new furniture and appliances.

Why the Fed is holding back on rate cuts 

So, here’s the reasoning for the Fed to hold off on cutting rates further, according to Fed Chairman Jerome Powell at his news conference Wednesday:

• The potential for rising unemployment is not high. The national unemployment rate was 4.1% in December. The January report, due Feb. 7, is expected to show the same rate.
• Inflation is at about 2.8%, much improved from 2022 but still not near the Fed’s target rate of 2%. Cutting rates now runs the risk of boosting inflation, Powell said. Boosting rates runs the risk of hurting the jobs market.
• The Trump administration has just arrived, with many policy proposals for deportations, deregulation, spending and tariffs. Many of the ideas have not yet come into focus. So, waiting seems prudent.

More Economic Analysis:

• Major fund manager reveals stock market forecast for 2025
• Surprising December retail sales report upends inflation bets
• Jobs report has big implications for Fed rate bets, Treasury yields

The president begs to differ

President Donald Trump was quick to criticize the Fed’s decision, saying the central bank was responsible for the inflation surge in 2022. 

“If the Fed had spent less time on [diversity-equity-inclusion], gender ideology, ‘green’ energy, and fake climate change, Inflation would never have been a problem,” he said on his Truth Social Platform. 

Last week, he demanded that banks globally cut interest rates and that members of the Organization of Petroleum Exporting Countries cut oil prices.

The market was still reeling from the AI selloff

Stocks were down Wednesday for the second time in three days on Wednesday.

Part of the loss was due to continued gyrations from the revelation that DeepSeek, a Chinese company, could develop artificial intelligence technology at much lower costs than companies using technology from Nvidia  (NVDA)  could. Nvidia fell 4.1% to $123.70.

Since a Jan. close of $149.43, Nvidia’s shares have slumped 17%. 

Related: Veteran fund manager issues dire S&P 500 warning for 2025

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