US Federal Reserve keeps rates steady amid persistent inflation pressures

Washington: The Federal Reserve on Wednesday held interest rates steady, with Chair Jerome Powell citing tariffs as a factor keeping goods prices elevated. The Fed’s decision leaves the target range for the federal funds rate at 3.5 to 3.75 per cent.

The Federal Open Market Committee “decided to leave our policy rate unchanged,” Powell told reporters. He said the economy “expanded at a solid pace last year” and is starting 2026 “on a firm footing,” with consumer spending described as “resilient” and business investment continuing to grow. However, he noted that housing “has remained weak.”

Powell also mentioned the recent federal government shutdown, saying it “likely weighed on economic activity last quarter,” but added that “those effects should be reversed as the reopening boosts growth this quarter.”

On employment, Powell said conditions “may be stabilising after a period of gradual softening.” The unemployment rate stood at 4.4 per cent in December and “changed little in recent months.” However, job growth has been slow. “Total nonfarm payrolls declined at an average pace of 22,000 per month over the last three months,” he said. Excluding government jobs, private payrolls rose by an average of 29,000 per month.

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Slower job growth is partly tied to labour supply. “A good part of the slowing … reflects a decline in the growth of the labour force due to lower immigration and labour force participation,” Powell said. He added that “labour demand has clearly softened as well.”

Inflation remains above target, tariff effects continue

Powell said inflation has cooled since 2022 but remains above the Fed’s goal. He cited estimates showing total PCE prices rose 2.9 per cent over the 12 months ending in December, with core PCE up 3.0 per cent.

“These elevated readings largely reflect inflation in the goods sector, which has been boosted by the effects of tariffs,” Powell said. He added that services are showing more progress: “Disinflation appears to be continuing in the services sector.”

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Regarding whether tariff effects have already passed through the economy, Powell said, “A lot of it has.” He noted that tariffs are “likely to move through and be a one-time price increase,” and that the Fed expects these effects to peak and then fade. “The expectation is that we will see the effects of… tariffs flowing through goods prices peaking and then starting to come down,” he said, “assuming there are no new major tariff increases.”

Powell said the Fed is not setting a timetable for its next move. “Monetary policy is not on a preset course,” he said, adding that decisions will be made “on a meeting-by-meeting basis.” He noted the Fed could ease again if inflation cools and the job market weakens: “A weakening labour market would be an argument for loosening.”

Asked about rate hikes, Powell said: “We don’t take things off the table,” but added that a hike is not the main expectation. “It isn’t anybody’s base case right now … that the next move will be a rate hike.”

Powell also warned about US deficits, describing the federal budget deficit as “uncontroversially on an unsustainable path,” and said, “The sooner we work on it, the better.”

On central bank independence, Powell defended the Fed’s separation from elected officials as standard practice in major democracies. He said credibility would be hard to restore if the public doubted the Fed’s motives. “If you lose that, it’s going to be hard to retain it,” he said, adding, “I’m strongly committed to that, and so are my colleagues.”