The U.S. Federal Reserve (Fed) voted Wednesday to pause its recent interest rate cuts as it overcomes questions about the central bank’s independence and awaits new leadership.
In response to market expectations, the central bank’s Federal Open Market Committee resolved to keep key interest rates in the range of 3.5-3.75%. The decision halted three consecutive quarters of percentage point cuts, billed as a maintenance measure to prevent a potential downturn in the labor market.
In voting to maintain the policy, the committee upgraded its assessment of economic growth. Concerns about the labor market relative to inflation have also receded.
“Available indicators suggest that economic activity is expanding at a solid pace. Employment growth remains low and the unemployment rate shows signs of stabilization,” a statement after the meeting said. “Inflation remains somewhat high.”
Importantly, the statement also removed a clause indicating that the Committee considered the threat of weakening labor markets to be a greater risk than rising inflation. Officials believe the Fed’s twin goals of low inflation and full employment are now more balanced, which may necessitate a pause in rate cuts, at least in the short term.
There was little guidance on what would happen next, with markets expecting the Fed to wait until at least June before adjusting benchmark interest rates again.
“In considering the extent and timing of further adjustments to the target range for the federal funds rate, the Committee will carefully evaluate future data, the evolving outlook, and the balance of risks,” the statement said, repeating language inserted in December that said the market sees this as a turn from the easing cycle that began in September 2025.
U.S. Treasury yields rose following the decision, but the S&P 500 Index remained at just $7,000.
Milan and Waller disagree.
As with recent meetings, there were also opposing views.
Governors Stephen Milan and Christopher Waller voted against keeping the rate unchanged, with both governors pushing for another quarter-point reduction. This was Milan’s fourth consecutive dissenting opinion, but he had previously advocated for a further half-point reduction.
Both officials were appointed by President Donald Trump, with Mr. Millan applying for an indefinite board seat in September 2025 and Mr. Waller being appointed during President Trump’s first term. Mr. Millan’s term expires on Saturday, while Mr. Waller has been interviewed for the role of Fed chairman, but that appears unlikely.
The remaining 10 FOMC members approved the hold, but in addition to the seven governors, this group included as voters New York Fed President John Williams and a new group of four regional presidents.
The routine nature of this decision comes at a time when nothing is routine for central banks.
Chairman Jerome Powell has two more meetings left in his term, ending a tumultuous eight years at the Fed that included a global pandemic, a deep recession and endless battles with President Donald Trump.
“If you look at the data we’ve had since our last meeting, the growth outlook has clearly improved,” Powell said at a press conference. “Inflation has continued largely as expected, with some labor market data suggesting some evidence of stabilization, so overall the forecast is actually stronger.”
Just recently, the Justice Department subpoenaed Powell over major renovations to the Fed’s headquarters in Washington, D.C., but even before that, the president had repeatedly threatened to fire Powell and actually moved to fire Governor Lisa Cook, pending a Supreme Court ruling.
Asked about his decision to attend oral arguments in the high court, Powell said the case was “probably the most important” case in the Fed’s 113-year history.
All of these tensions are underlined by contestations over the Fed’s independence, or its ability to operate without political interference. In acknowledging the Justice Department investigation, Mr. Powell was unusually candid in saying the threat was due to President Trump’s efforts to control monetary policy. Previous presidents have criticized the Fed’s decisions and tried to force policymakers to cut interest rates, but no president has been as aggressive and openly committed to lowering rates as Trump.
The Fed also has a difficult economic background to overcome.
Growth, as measured by gross domestic product, the broadest measure, has been strong. Prices rose 4.4% in the third quarter and 5.4% in the last three months of the year, according to the Atlanta Fed.
At the same time, employment in the labor market is slumping due to the Trump administration’s crackdown on illegal immigration. However, layoffs have also been curtailed, and the number of new unemployment insurance claims is at its lowest level in the past two years.
But inflation turned out to be even more troublesome. Even though they hit a 40-year high in 2022, interest rates are still hovering closer to 3% than the Fed’s 2% target, raising concerns among some FOMC officials, who want to suspend or eliminate rate cuts until there is more evidence that price increases are moderating.
President Trump’s tariffs are behind the scenes when it comes to inflation, and Fed economists generally expect them to add short-term pressure that will ease by the end of the year.
Regardless of who becomes the next Fed chair, futures markets are pricing in up to two rate cuts in 2026 and no rate cuts in 2027. Market forecasts are pegging BlackRock’s head of fixed income, Rick Reeder, as the likely candidate to replace Mr. Powell.
