The Fed kept rates steady at 4.25%-4.50%, signalling caution amid strong US growth and elevated inflation. Meanwhile, the ECB faces pressure to cut rates further as the eurozone economy weakens. The euro fell to 1.04.
The Federal Reserve decided to keep interest rates unchanged in the 4.25%-4.50% range during its January meeting, in line with market expectations.
Following three consecutive rate cuts totalling one percentage point, the US central bank’s policymakers opted to hit the brake at the first policy meeting since the Trump administration took office.
The US economy remains resilient, with a strong labour market. However, inflation is still deemed ‘somewhat elevated’, prompting the Fed’s committee to reiterate the cautious approach outlined in December:
“In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.”
Essentially, the timing and scale of any further rate cuts will depend on economic data and emerging risks – a notion that had sparked concerns among market participants last month.
The Fed continues to exercise caution, choosing to assess economic developments before implementing further monetary easing—a luxury not available for the European Central Bank, which faces mounting pressure to cut rates more aggressively.
Fed-ECB policy divergence grows
In December, the Fed surprised markets by raising its inflation forecast for 2025 to 2.5% and cutting its projection for interest rate reductions to just two for the year, down from four in its September outlook.
Fed Chair Jerome Powell underscored that rates are close to neutral levels and that any further cuts must be approached with great care.
While the US economy’s strength and persistent inflation are keeping Fed policymakers on edge, the situation in Europe is markedly different: economic outlook is deteriorating, and inflation is making steady progress towards the 2% target.
On Wednesday, the German government slashed its 2025 economic growth forecast to just 0.3%, down from the previous estimate of 1.1% in October.
Economy Minister Robert Habeck described the economic situation as “difficult” and warned that stagnation has persisted for an extended period, exacerbated by labour shortages, excessive bureaucracy, and insufficient public and private investment.
Market expectations currently point to two Fed rate cuts in 2025, beginning in June, while the ECB is expected to implement four rate cuts by year-end.
Euro weakens to 1.04 ahead of Powell
Following the Fed’s decision and ahead of Powell’s press conference, the euro fell to 1.04 against the US dollar, reflecting the greenback’s strength amid growing monetary policy divergence between the two economies.
Powell is also likely to face questions over Donald Trump’s renewed efforts to influence the Fed’s decision-making.
Speaking via videoconference at the World Economic Forum last week, the newly elected US president explicitly stated that he would push for lower interest rates, a stance that could increase political pressure on the central bank in the coming months.
