The Federal Reserve is widely expected to pause interest rate cuts this week after three reductions in the final months of 2025. Less clear, however, is just how long that pause will last.
Fed officials, once worried about a weakening labor market, no longer appear to be in as much of a rush after bringing rates down to a range of 3.5 percent to 3.75 percent. A steadily growing economy and low layoffs have given them some comfort that they can afford to take their time with further cuts, especially as they stare down the prospects of another year of inflation well above their 2 percent target.
What lies ahead for the Fed is a tenuous balancing act. Policymakers do not want to jeopardize the labor market by keeping rates too high for too long, but they also want to ensure they are restraining the economy enough to stamp out any lingering price pressures.
Officials are contending with this as the institution finds itself under attack by a White House that wants borrowing costs to be much lower. Jerome H. Powell, the Fed chair, accused the administration earlier this month of opening up in retaliation a criminal investigation into his handling of costly renovations at the Fed’s headquarters in Washington, a broadside that drew rare rebukes of President Trump from Republican lawmakers.
Wednesday’s vote on rates also comes after Lisa D. Cook, a Fed governor, was forced to defend her ability to remain at the Fed after Mr. Trump tried to oust her last year. While the Supreme Court has yet to deliver a final ruling, several justices at last week’s hearing appeared wary about the Fed’s ability to operate free of political meddling if her firing was upheld.
Mr. Trump, who has not shied away from sharing his desire to fill a majority of the seats on the Fed’s board of governors with his supporters, is also close to announcing a successor for Mr. Powell when his term as chair ends in May.
A pause in rate cuts, however long it will be, will no doubt inflame tensions between the Fed and Mr. Trump. But without more substantive signs that the labor market is deteriorating, economists do not expect the central bank to budge.
“It’s time to sit back and take a look at things,” said Peter Hooper, vice chair of research at Deutsche Bank. “We will get some further easing, but it’s not urgent at this point.”
An Extended Pause?
The Fed’s deliberations until now have been uniquely fraught. With each subsequent quarter-point cut last year, beginning in September, officials grew more divided about what to do about rates.
This culminated in December with one of the central bank’s most divisive votes in years. Two members of the 12-person policy-setting committee dissented against the cut in favor of standing pat, while four other officials registered “soft” dissents by penciling in rate forecasts that were higher than where rates ended the year. Their primary concern was inflation, which they worried was at risk of getting stuck above the 2 percent target as the full effects of Mr. Trump’s tariffs materialized and the economy remained resilient.
On the other end of the spectrum sat Stephen I. Miran, who joined the Fed’s board in September after Mr. Trump nominated him, and for a third-straight meeting voted in favor of a larger, half-point cut. Mr. Miran has said that his colleagues are overly concerned about inflation and are risking a recession by not cutting more aggressively.
These divisions have not disappeared, but they have greatly diminished now that rates are closer to a “neutral” level that does not rev up economic growth, but does not restrain it either. That has given the central bank some breathing room, said William Dudley, who was president of the Federal Reserve Bank of New York from 2009 to 2018.
So too has the economic data, even though it is still impacted by distortions caused by last year’s government shutdown. Inflation ended last year more subdued that feared. The labor market, while sluggish, steadied last month, with the unemployment rate slipping back to 4.4 percent.
“Right now, I think they’re much more comfortable than they were even six months ago,” Mr. Dudley said. “The downside risks to the labor market have lessened and the upside risks to inflation have lessened.”
New Leadership
Economists expect this relatively benign outlook to extend through much of 2026, especially with Americans expected to soon receive bigger tax refunds because of provisions in legislation Mr. Trump signed into law last summer.
Officials have adopted a similarly sanguine view. John C. Williams, president of the New York Fed, told reporters earlier this month that the “economic situation today is quite favorable.”
He described growth as solid, and said the labor market was showing signs of stabilizing. Coupled with inflation continuing to ease, Mr. Williams said, “I feel like we’re in a good place.”
So long as that remain the case, it will be hard to justify more rate cuts, said Raghuram Rajan, a former governor of the Reserve Bank of India. “Inflation is still a problem,” he said. “You can’t have 3 percent inflation for this long without being worried.”
That suggests that the burden of restarting cuts will likely fall on the next chair of the Fed, whose first meeting, if confirmed by the Senate in time, would be in June.
Mr. Trump has said that he would not pick someone who does not support significantly lower borrowing costs, so the question is not whether that person would back more cuts but the magnitude of cuts they will push for. They would then need to convince the rest of the policy-setting committee, which is made up of all seven governors, the president of the New York Fed and a rotating group of four regional bank presidents. In an interview earlier this month, Neel T. Kashkari, who as president of the Minneapolis Fed will be a voting member this year, said the next chair is going to have to “bring forward the best arguments that he or she can and then win the votes based on the data and the analysis.”
Mr. Kashkari will be joined by Beth M. Hammack of the Cleveland Fed, Lorie K. Logan of the Dallas Fed and Anna Paulson of the Philadelphia Fed. All but Ms. Paulson appeared skeptical about cutting rates at some point last year, suggesting they are unlikely to support substantial reductions unless the economic backdrop dramatically shifts.
“The Fed chair can influence the way things are going, but he’s not going to be able to walk in and direct the committee to do something it’s not inclined to do,” said Mr. Hooper, who worked at the Fed for nearly 30 years. “That is a power that is earned over a number of years of experience.”
Colby Smith covers the Federal Reserve and the U.S. economy for The Times.
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