Analysts expect US Fed to hold interest rates steady in first 2025 meeting

Markets are expecting the meeting this evening of the US Federal Reserve will keep interest rate unchanged. The meeting comes amid increasing economic and political challenges, while investors are anticipating Jerome Powell's statements to determine the path of monetary policy.

The Federal Reserve cut interest rates three times in 2024 by a total of 100 basis points (bps) to uphold the economy despite inflation remaining above the 2% target.

Labor market data also showed resilience, with unemployment at 4.1% as 256,000 jobs added last December. In its last meeting, the Fed decided to keep interest rates unchanged, in a move that reflected its cautious stance towards ongoing inflationary pressures.

While US President Donald Trump is calling for a rapid interest rate cut to boost the economy, analysts surveyed by Argaam believe that the central bank will maintain its cautious approach while monitoring economic data, thus keeping rates on hold in the near term.

Analysts also expected the Fed to keep interest rates steady, noting that economic data continues to indicate resilience in the labor market and inflationary pressures above target, which supports the Fed’s stance to maintain its current monetary policy.

Ben Powell, Chief Middle East & APAC Investment Strategist for BII 

Saad Al-Thaqfan, economic analyst and board member at the Saudi Economic Association

Saad Al-Thaqfan, economic analyst and board member at the Saudi Economic Association, expected that based on economic data, interest rates could be held steady at the January 2025 meeting, and remain at these levels until data confirming control over inflation emerges.

He pointed out that he does not expect surprises in the markets or in the prices of the dollar and treasuries, as this has been largely priced in, with a small percentage remaining unpriced for the possibility of surprises.

The US Fed Chairman's press conference and the signals that investors will pick up from his speech will have an impact on markets, bonds and the dollar, which may affect expectations of future interest rate movements, he told Argaam.

Wael Makarem, Chief Market Strategist for MENA at Exness

Wael Makarem, Chief Market Strategist for MENA at Exness, stated that the Fed is expected to keep interest rates steady in January 2025, based on the resilience of the labor market, as the unemployment rate is 4.1%, and 256,000 jobs were added in December, in addition to inflation remaining above target, as the core consumer price index is 3.2%, and the general index rose to 2.9%.

The analyst also expected the Fed to keep interest rates steady at 4.25% - 4.5% at its meeting in January 2025, after three consecutive cuts in 2024 that reduced rates by 1%. He pointed out that despite the decline in inflation, policymakers remain cautious, as price pressure continues above the 2% target.

Trump and the Fed: Political pressures on monetary decisions

President Trump's calls to immediately cut interest rates are unlikely to affect the Federal Reserve's decisions in the near term, given the central bank's independence and its reliance on data in making its decisions, according to Makarem.

For his part, Al-Thaqfan indicated that it is well known that central banks are operating separately and they enjoy complete independence without government intervention, as they monitor the economic situation and inflation through economic data. "We have recently noticed pressures and signals from governments to direct monetary policies, so the US President may exert some pressure on the Fed to lower rates,” he added.

Makarem pointed out that Fed Chairman Jerome Powell confirmed that monetary policy remains away from political influences, noting that Trump's trade proposals, such as imposing 25% tariffs on Canada and Mexico, may fuel inflation, which complicates plans to cut interest rates. He also said that legal systems protect Fed leaders from dismissal due to disagreements with political officials, adding that political risks, including Trump’s proposed tariffs and immigration restrictions, could reignite inflation or disrupt labor supply, prompting the Fed to wait for more clarity.

How can oil prices affect inflation and interest rates? And what are their implications for markets?

Lower oil prices could help ease inflationary pressures, but their direct impact on the Fed’s interest rate decisions is likely to be limited, said Makarem.

He pointed out that the Fed focuses on core inflation and the labor market, while taking into account multiple economic indicators, thus making oil prices one of the several factors in the Fed’s overall assessment of economic conditions.

However, if Trump succeeds in his policy of increasing domestic production and reducing oil prices, this will likely have a direct impact on inflation levels, providing the appropriate conditions for the Fed to lower rates.

As for the expected scenarios for market response if the Fed decides to keep interest rates steady, Makarem said that markets have already priced in this decision, while the focus will be on Powell’s statements regarding monetary policy expectations, especially with regard to the economic policies put forward by President Trump and the latest inflation data.

Powell’s statements may affect market sentiment, especially with regard to inflation risks that may arise from proposed tariffs and immigration policies, he added.

The analyst also pointed out that if Powell’s tone is hawkish, the dollar may regain its momentum, which may lead to negative pressures on stock markets, while commodities such as gold may come under some pressure with the rise of the greenback.

He added that if Powell's tone was more dovish towards the possibility of lowering interest rates, this could weigh on the dollar, thus reversing the results of the first scenario.