Fed holds rates steady as inflation, growth temper case for further cuts

The Federal Reserve on Wednesday held interest rates steady, citing resilient labor market conditions and persistent inflation that tempered the case for further policy easing following three rate cuts last year.

The Federal Open Market Committee (FOMC) kept its benchmark rate unchanged in a range of 4.25%-4.50%, reinforcing a more measured approach to monetary policy as economic growth and inflation remain firm.

"The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated," the Fed said in its policy statement.

The decision signals the central bank's caution over easing too soon, with officials assessing whether borrowing costs remain sufficiently restrictive to cool inflation without stifling economic expansion.

Uncertainty around the neutral rate, or r*—the level at which policy neither stimulates nor slows the economy—has also clouded the Fed’s outlook. Policymakers have raised their estimates of r* multiple times over the past year, suggesting previous projections may have underestimated the level needed to maintain balance.

"Throughout the four editions of the Summary of Economic Projections (SEP) in 2024, the central tendency of the long-run dot has risen from 2.50% to 3.0%. This implies that in this ‘r-r*’ framework, policy rates were actually 50 basis points less restrictive throughout the year than previously estimated," analysts at Jefferies said in a note.

The Fed’s next policy meeting is set for March 19-20, with investors looking for further signals on the central bank’s rate trajectory.