Will Fed cut interest rate today amid Trump’s pressure?

The Federal Reserve began its first meeting of the year today, Jan. 29, at a critical moment and a potential turning point in its trajectory, a few months after initiating a monetary easing cycle.

Policymakers now find themselves facing the risk of renewed inflationary pressures and concerns over a potential clash with US President Donald Trump.

What makes this meeting particularly significant? And what signals or decisions that might emerge?

Who Calls the Shots?

The 12-member Federal Open Market Committee (FOMC) sets the Fed’s monetary policy.

The committee meets eight times a year to determine the policy stance and assess risks to long-term goals, including price stability and sustainable growth.

It consists of seven Fed governors, in addition to New York Fed President and four regional Fed presidents, who serve one-year rotating terms.

A Complex Backdrop

The Fed cut rates by 50 basis points (bps) in September 2024. This was the first reduction of this kind in four years and ended a tightening cycle that began in March 2022.

At the time, policymakers had projected an additional 50-bp cut by year-end 2024 and a further 100 bps in 2025.

The Fed has already delivered two 25-bp cuts in late 2024 but scaled back its 2025 expectations, now signaling just 50 bps of easing.

Stubborn Inflation

In December 2024, the FOMC noted that economic activity was growing steadily, and labor market conditions had improved.

While inflation had eased, the statement emphasized that it remains elevated relative to the Fed’s 2% target.

A Shift in Approach

Following the December 2024 meeting, Fed Chairman Jerome Powell signaled a more cautious stance. He stressed that future rate cuts would depend on incoming data, rather than being predetermined.

What is Data Saying?

The core personal consumption expenditures (PCE) index, the Fed’s preferred inflation gauge, rose 2.8% year-on-year (YoY) in November 2024, matching October’s pace.

Meanwhile, consumer confidence weakened. The Conference Board’s index fell to 104.1 in January, from 109.5 in December 2024, as expectations suggest inflation would accelerate again.

A White House Clash

With the victory of Donald Trump in the presidency race last November, speculation was raised that he would collide with Powell and may seek to dismiss him, after criticizing Trump for not alleviating monetary policy enough during his first term.

In response, Powell said after the presidential elections, he would not resign if Trump asked him because he does not have the authority to dismiss him. Press reports claimed that the Fed referred to a legal team to prepare for potential scenarios in this regard.

What does Trump say?

The US president's tone seemed less severe after winning the elections, but he still believes that he has the right to comment on whether the interest rate should be raised or reduced. Trump said after his inauguration last week that he would seek to cut interest.

Markets in Waiting Mode

In addition to the interest rate decision, markets are closely following Powell’s post-meeting comments today. Analysts expect that Powell will react to Trump's request and strongly defend the Fed’s independence.

What About the Rate Decision?

The CME FedWatch Tool indicated a possibility of more than 97% to fix interest rates during today's meeting. This matched analysts' expectations for leaving borrowing costs unchanged after about four months of starting the monetary easing cycle.

Deep Divide

Beyond Trump’s public remarks on Fed policy, analysts warn his spending and tariff plans could drive inflation higher. This may complicate rate cuts.

Despite this, Powell is expected to avoid questions on tariffs and Trump’s policies, as details remain unclear.

No Easy Choice

Economist Mohamed El-Erian warns that by 2025, the Fed will face two tough options. It must either tolerate above-target inflation or try to curb it—risking recession.

What’s Your Call?

Imagine you are on the FOMC today. With risks like a White House clash, rising inflation, and a slowing economy, what would be your decision?

Rate move: Cut, hold, or hike?

Response to Trump’s demand for immediate cuts?

Sources: Argaam, Federal Reserve, Bureau of Economic Analysis, MarketWatch, CNBC, Associated Press