Unchanged Rates, Persistent Inflation: The Fed Stays the Course on Monetary Policy

The Fed’s Monetary Policy in 2025: Analysis, Strategies, and Outlook

The Fed's monetary policy remains cautious in 2025. Find out why Jerome Powell is delaying rate cuts despite persistent inflation.

Adopting a Wait-and-See Stance in Uncertain Times

For several months, the Fed's monetary policy has remained decidedly cautious. Inflation has dropped from its peaks but still sits above the 2% target. The unpredictable effects of new tariffs, downgraded growth forecasts, and a cooling labor market are leading Jerome Powell to wait and see.

The Fed’s Policy: Caution as a Guiding Principle

Unchanged Rates at 4.25%-4.50%: A Strategic Choice

Jerome Powell confirmed keeping rates in the 4.25% to 4.50% range, describing the stance as "moderately restrictive." This means the Fed is holding rates high enough to dampen demand without causing a recession.

A Data-Dependent Approach

Instead of committing to a calendar for rate cuts, the Fed wants to watch incoming data before making any decisions.

Some recent figures:

• Core PCE inflation forecast at 2.7% for 2025
• Real GDP growth revised down to 1.7%
• Unemployment rate expected at 4.4%

Tariffs and Inflation: A Key Source of Uncertainty

Tariffs = Potential Inflation

Powell acknowledged that new tariffs could cause a temporary increase in prices. However, he noted the duration and intensity of this impact remain uncertain.

Peterson Institute Estimate: New tariffs could add between 0.3 and 0.5 percentage points to annual inflation.

"We need to see the actual data to make better decisions."

Labor Market: Resilience and Internal Adjustments

An Employment Market Still in Good Health

The job market remains strong, though there are signs of slowing. Unemployment could reach 4.4% in 2025 but remains historically low.

Internal Streamlining at the Fed

Powell announced a planned 10% reduction in Fed staff over two years. This will not impact critical functions, but underscores a push toward modernization and resource optimization.

The Dot Plot and FOMC Expectations

Rate Cut Scenarios for 2025

At the last meeting, FOMC members indicated:

• 4 members foresee a single 25-basis point cut
• 9 members anticipate two cuts
• 2 members see three cuts

This highlights a lack of consensus, but a majority lean toward cautious moderation.

Terminal Rate Revised Upward

The Fed now forecasts a terminal rate of 3.4% in 2027, up from 3.1% previously. This suggests a slow normalization toward a higher-rate regime.

Looking Back: From Covid Shock to Normalization

Summary of rate movements since 2020:

• 2020: Rates at 0% due to the pandemic
• 2021: Ultra-accommodative stance maintained
• 2022: First rapid hikes
• 2023: Aggressive tightening cycle
• 2024–2025: Stabilization at 4.25%–4.50%

Risks to Watch

1. Persistent service sector inflation
2. New tariffs
3. Weaker labor market
4. Geopolitical or energy shocks
5. US public debt tensions