The Fed decided to hold rates steady after the Federal Open Market Committee (FOMC) meeting that ended January 29, leaving the target for the federal funds rate at a range of 4.25% to 4.50%.
While investors were widely anticipating this pause, it confirmed just how much the outlook for Fed policy has shifted in the past several weeks. As recently as early December, investors were focused on how many cuts may be on the table in 2025. Now, many investors are instead wondering if the Fed is actually done cutting—even though rates are still much higher than some investors had been hoping.
Read on for 5 takeaways from the Fed’s meeting.
1. What’s been going on with unemployment and inflation?
The Fed’s actions are always grounded by developments in unemployment and inflation—due to the Fed’s “dual mandate” of keeping unemployment low while also keeping inflation low and stable.
In recent weeks, neither indicator has been tipping the scales in favor of further cuts.
Investors might remember that it was a surprise uptick in unemployment last summer that really jump-started the Fed’s cutting cycle. For a few months, investors and the Fed were trying to discern if the labor market was deteriorating (as it might at the start of a recession), or if the weakness merely represented a cooling from overly hot levels. The Fed moved quickly to cut rates, with its initial half-a-point cut in September, to try to head off any further weakening.
But since then, the jobs market has shown greater strength and stability. The US economy added more jobs than expected in each of the past 2 months, and the unemployment rate has been holding fairly steady. This has helped alleviate those fears of deterioration—but has also alleviated any sense of urgency over further rate cuts.
“The Fed seems to be feeling a lot more comfortable with where the job market is right now,” says Kana Norimoto, the macro strategist on Fidelity's fixed income research team who covers the Fed.
At the same time, the year-over-year inflation rate has remained stubbornly above the Fed’s 2% target, and has even ticked back up slightly on several major measures.
This does not mean that the Fed’s policies have been ineffective against inflation. For example, Norimoto notes that the month-over-month inflation rate recently showed an encouraging decline. But it does, on balance, weigh against further rate cuts in the immediate near term.
2. Did anything else contribute to the Fed’s decision to pause?
The Fed may also be proceeding with particular caution given the likelihood of policy changes from the new administration. Policies on tariffs and trade, budgets and deficits, and individual and corporate taxes can all meaningfully impact the outlook for the economy and inflation.
"Given all that uncertainty, and given the stability in unemployment and inflation, it would make sense if the Fed wants to pause and wait for more clarity,” says Andrew Garvey, the lead monetary policy analyst on Fidelity’s Asset Allocation Research Team.
3. Is this the end of rate cuts?
It’s not clear yet whether the Fed is now finished with rate cuts for this cycle, or whether this is merely a pause before additional cuts.
Norimoto notes that the Fed may prefer to “leave the door open” for future cuts in case something unexpectedly changes in the job market or broader economy—so the central bank is unlikely to commit itself to a particular end point.
The Fed's most recent dot plot was released in December and showed that a median of FOMC members were expecting 2 cuts of 0.25 of a percentage point over 2025. But the Fed didn't release an updated chart at the January meeting (its next dot-plot update will be in March).
4. Why have other interest rates been rising?
The Fed only controls interest rates on very short-term loans (the fed funds rate is the rate banks charge one another for overnight loans). Rates on longer-term loans, like 10-year Treasurys or 30-year mortgages, are driven by market forces.
Since September, even though the Fed has cut its key interest rate by a full percentage point, interest rates on long-term loans have actually been rising.
It's challenging to tease out the exact causes behind that rise, because long-term rates are subject to such complex and interconnected forces.
On the positive side, Jake Weinstein, senior vice president on Fidelity’s Asset Allocation Research Team, says the rise has partly been a response to strong US economic growth in 2024 and rising growth expectations for 2025 and beyond (longer-term interest rates tend to rise and fall in line with economic growth).
However, investors are also now expecting slightly higher future inflation than they were a few months ago, Weinstein says, which adds to higher rates. And as investors have reduced their expectations for future rate cuts from the Fed, it has put further upward pressure on longer-term rates. Finally, some investors may be concerned about the federal deficit, and the possibility that high US indebtedness could eventually turn some investors off of Treasurys. If that were to happen it could put yet more upward pressure on long-term interest rates.
At any rate, this disconnect has caused some angst among investors and helped contribute to bumpiness in the stock market, as investors have worried that high long-term rates could hurt the earnings of businesses that rely on debt. High long-term interest rates can also pressure stock valuations like price-earnings (PE) ratios.
5. What might it mean for you?
There are no easy answers as to where interest rates go from here. While the Fed seems to clearly be in "pause" mode now, this could always change with new data. And long-term interest rates can be even more difficult to forecast, due to the complexity of the forces that drive them.
Rather than try to forecast where interest rates may head next, many investors might be better served by an investing plan that's suited to their goals, needs, and risk tolerance, and that they can stick with through a variety of interest-rate and market environments.
If you need help making a plan (or making one you can stick with), you can learn more about how we can work together.