Update 839 — Fed Hits Pause on Rates;
OMB Does Likewise on Spending Freeze
The Federal Reserve hit pause, as expected, on interest rates at the conclusion of its first rate-setting meeting of the year this afternoon. The interest rate decision comes less than two weeks after President Trump was sworn in for a second term and after he pressured the Fed to lower interest rates immediately and issued sweeping executive directives, including freezing federal hiring, regulation, and earlier this week, federal grants and loans.
Today, we briefly discuss the Trump administration’s needlessly disruptive and short-lived freeze on federal grants and loans announced Monday – which was rescinded this afternoon by Acting Director of the OMB Mathew Vaeth less than 24 hours after it had been scheduled to take effect yesterday – before diving into today’s Fed’s interest rate decision. We will further explore the freeze in our update on Friday.
Best,
Dana
Ådministration Freezes, Unfreezes Federal Funding
Monday night, Trump’s Office of Management and Budget (OMB) released a memo directing Federal Agencies to “pause all activities related to obligation or disbursement of all Federal financial assistance,” amounting to a freeze of up to trillions of dollars in funding appropriated by Congress.
This freeze sent the country into a frenzy on Tuesday, with agencies and programs reportedly blocked from accessing the portal they used to draw down federal funds. The memo, M-25-13, “Temporary Pause of Agency Grant, Loan, and Other Financial Assistance Programs,” gave rise to mass confusion and outcry by states, agencies, and members of Congress. OMB narrowed the scope of the funding “pause” to programs that are inconsistent with Trump’s previously issued executive orders and stated that “any program that provides direct benefits to individuals is not subject to the pause.” Given the vagueness of many of Trump’s executive orders and the administration’s reluctance to specifically define programs that provide direct benefits, the “clarification” from OMB was still insufficient to members of Congress and agencies.
This afternoon, OMB Acting Director Vaeth announced that M-25-13 “is rescinded.” Democrats had pushed back strongly, calling these actions an unconstitutional impoundment of Congressionally appropriated funds and requesting a delay in the Senate confirmation vote for Trump’s pick to lead the OMB, Russell Vought (a strong advocate for impoundment). Concerns were shared by Republicans as well, with Senators Lisa Murkowski (R-AK), Don Bacon (R-NE), Susan Collins (R-ME), and Lindsay Graham (R-SC) expressing concern about the lack of information offered by the Trump administration and the potential detrimental impact a full-scale pause of federal funding could have on their constituents.
Though agencies and advocates are still sifting through the damage caused by yesterday’s frenzy and the temporary lack of access to federal funds for some programs, this effort had been temporarily blocked by a federal judge yesterday, just minutes before it was set to go into effect at 5 P.M.
The Trump administration’s dangerous and unlawful freeze of federal funding is an example of its reckless exercise of power at the expense of the millions of Americans who rely on federally funded programs. Despite statements from the administration that tried to temper the directive’s scope and distinguish the “pause” from unconstitutional impoundment, we should not be deluded. Trump and Republicans have shown us this part of their playbook before through campaign statements, detailed writings like Project 2025, and testimony in front of the Senate, including by OMB Director nominee Vought.
While the immediate danger has been scaled back, we can expect to see the Trump administration continue its attempts to claim Congress’s constitutional power of the purse, threatening the checks and balances that have made the U.S. a shining example of democracy on the global scale.
Federal Reserve Holds Interest Rates Steady
The Federal Reserve opted to hold interest rates steady at the 4.25 to 4.5 percent range this afternoon at the conclusion of the Federal Open Market Committee’s (FOMC) first meeting of 2025. The pause comes after the Fed cut rates by a full percentage point over three consecutive meetings late last year.
The highly expected decision was overshadowed by questions:
- Will the Fed hit pause again at its next meeting in March?
- Will the Trump administration’s proposed mass deportations and potential tariffs disrupt years of progress on inflation and jeopardize the 50 basis points of cuts the Fed previously projected for this year?
- Will President Trump’s continued threats to undermine the Fed’s independence materialize and how will Fed officials attempt to protect the integrity of the institution and its monetary policy decisions?
At Federal Reserve Chair Jerome Powell’s press conference following the meeting, Powell refrained from hinting at whether FOMC members were inclined to hold rates steady or cut at their next meeting, reiterating that members are continuing to take a data-dependent approach. He, however, noted that Committee members do not need to see inflation at the Fed’s target of two percent before cutting rates further, but would like to see further progress.
Powell was hesitant to comment on the potential impact of the Trump administration’s proposed and ongoing policy changes, particularly shifts related to tariffs, immigration, fiscal policy, and regulatory policy. He noted that elevated uncertainty about shifts in these policy areas will likely subside as the administration’s path becomes clearer.
Powell had no comment on Trump’s recent statements that he would demand the Fed immediately cut rates beyond saying he has not had contact with the President.
Fed Decision Within the Current Interest Rate Cycle
Today’s pause comes as the Fed continues to bring interest rates down from a two-decade high. The FOMC began raising the federal funds rate from near zero in early 2022 to peak levels reached in July 2023 in an effort to combat rising inflation. The Committee raised rates to the 5.25 to 5.5 percent range in its most aggressive series of rate hikes since the 1980s, then held rates steady at this elevated level from last July to this September when it finally began bringing rates down. The Fed has since cut rates by a total of 100 basis points in the final three FOMC meetings of last year.
The Fed has made significant progress in bringing down the rate of inflation since it initiated its cycle of rate hikes, but inflation remains stubbornly above the Fed’s two percent target. The Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) price index, has fallen significantly from its peak of 7.1 percent in mid-2022 but has been ticking up in recent months and reached 2.4 percent in November. Core PCE – which strips out food and energy prices – has remained sticky at about 2.8 percent over the past several months, lapping the low readings of late last year even as housing inflation has begun to fall.
This stickiness prompted FOMC officials to reduce their projected rate cuts for this year – in September, officials projected that they would cut rates to 3.4 percent by the end of 2025, which suggested four rate cuts of 25 basis points this year, but in December officials instead expected to bring rates to about 3.9 percent by the end of 2025, suggesting two 25-basis point cuts. FOMC officials have reiterated their focus on reaching the two percent target and continued firm inflation data may suggest it is appropriate to hold rates at an elevated level for longer to achieve this goal.
The labor market has proven resilient despite the higher interest rate environment of the last year and a half but has begun showing signs of weakness below the surface. Powell once again reinforced today that FOMC officials no longer view the labor market as a source of inflationary pressure. The unemployment rate has remained historically low, staying fairly consistent between 4.1 and 4.2 percent for the past seven months. Strong job gains over the beginning of last year moderated as the year progressed with a healthy average of about 170,000 jobs being added to the economy over the final three months of 2025. Wage growth has also eased while the jobs-to-workers gap has narrowed. Once the labor market remains generally strong and continues to cool in a gradual and orderly way, FOMC officials may be further inclined to hold rates at an elevated level.
Trump’s Latest Attacks on Fed Independence
The Fed’s interest rate decision came about a week after President Trump suggested that he would “demand that interest rates drop immediately” as part of his administration’s economic agenda. In an address to the World Economic Forum last Thursday, Trump said, “I’ll demand that interest rates drop immediately. And likewise, they should be dropping all over the world. Interest rates should follow us all over.”
Trump’s repeatedly outspoken disrespect of the Federal Reserve’s independence in its monetary policy decisions are persistent threats to undermine it. During his first term, Trump clashed with Fed Chair Powell after appointing him to the position in 2018, falsely claiming that he had the right to fire him. Earlier this year, Trump baselessly accused Powell of considering rate cuts geared to help Democrats in the 2024 general election, even as Powell consistently ignored him as well as calls by Congressional Democrats to lower rates. Powell has affirmed the President is not permitted under the law to fire him before the end of his term which concludes in 2026 and that he will not resign.
Lowering interest rates too fast or too far could disrupt the strong progress made on inflation over the past two and a half years. Additionally, an erosion of the Fed’s independence in its monetary policy decisions would in turn erode the confidence of domestic and international market participants in America’s ability to balance price stability and labor market strength, particularly in times of stress, without being susceptible to political influence.
Trump’s comments are particularly chilling given his administration’s drastic executive actions over its first days in office in which it has attempted to use blatantly unconstitutional means to achieve its goals and replace experienced and expert career civil servants with politically-appointed Trump loyalists.
Risk of Trump Policies Reigniting Inflation
Any erosion of the Fed’s independence by Trump would be deeply concerning, but this is far from the only risk Trump may pose to the Fed achieving its monetary policy goals.
The new administration’s severe escalation of deportations has begun, with Immigration and Customs Enforcement (ICE) officials being directed on Saturday to fill increased deportation quotas. Trump has promised the largest mass deportation in American history. Approximately 8.3 million undocumented immigrants are estimated to be in the workforce and deportation at this historic scale would push inflation higher and lower employment and real GDP over the long term according to estimates by the Peterson Institute for International Economics.
Additionally, Trump campaigned on implementing a 10 to 20 percent tariff on all imports entering the United States while raising duty rates on goods from China to 60 percent. While new tariffs were not implemented on Day 1 of his presidency as forecasted throughout the campaign, Trump has since threatened the following actions:
- 25 percent tariff on goods from Mexico and Canada on February 1
- 10 percent tariff on China on February 1
- Briefly proposing a 25 percent tariff on Colombian goods following a dispute over deportation flights
These tariffs threaten to increase inflation and reduce GDP. Overall, the Peterson Institute for International Economics estimates that Trump’s proposed mass deportations, tariffs and erosion of the Fed’s political independence could increase inflation to as high as 6.0 to 9.3 percent in 2026.
It is crucial that Federal Reserve officials fiercely defend their independence and that of the larger institution over the coming months and years. It is also critical that Congressional Democrats recognize that Trump’s proposed immigration and trade agenda pose serious risks to the American economy and stand united in opposing the Republicans’ mass deportation and protectionist policies.
The FOMC meets next to determine the fate of interest rates on March 18 and 19.