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Fed outlook: A pause, not a stop

Quick takes on capital markets

January 31, 2025 | 2 min read
Seema Shah
Chief Global Strategist
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The Fed’s January pause reflects a balancing act—assessing the impact of prior easing while navigating growth resilience and new inflation risks. While rate cuts remain likely given still-restrictive policy and ongoing economic fragilities, Trump administration policy uncertainty could cloud the picture. With no urgency to move, the Fed is keeping its options open, making the path ahead highly uncertain.

Following three consecutive rate cuts, the FOMC has paused its policy easing cycle. While the path ahead for rates is clouded by uncertainty around the Trump administration’s policies, the bias is still for further cuts.

The case for a more cautious and measured Fed is strong. In Q4 2024 the U.S. economy grew 2.3%, slightly above trend, so the immediate need for further policy loosening is not obvious. The Fed also needs to wait and see how the 100bps of policy easing already delivered impacts the economy.

Furthermore, the Fed needs to be alert to the inflation risks stemming from proposed tariff policies. Estimates of the potential inflation impact range from a 0.5% to 2% increase, and while central banks typically look through one-off increases from tariffs, they must be mindful of the risk that inflation expectations start to drift higher.

Yet, despite these uncertainties, the hurdle for a rate hike remains elevated even as the Fed retains an easing bias. Chair Powell stated that, even after 100bps of easing, policy rates are meaningfully restrictive, and they expect inflation progress to eventually resume—they just aren’t sure when. Crucially too, with tentative fragilities still present in low-income households, small businesses and manufacturing, additional interest rate relief will likely be required.

Further policy loosening is likely this year but, without any urgency to cut, the timing of those moves is particularly uncertain.

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