Under Political Fire, Fed Holds Rates As It Waits Out Tariff-Driven Inflation

The Federal Reserve held its benchmark rate flat at its first meeting of the year, a widely expected move that comes against the backdrop of an uneasy macroeconomic balance. 

“The upside risks to inflation and the downside risks to employment have diminished, but they still exist,” Fed Chairman Jerome Powell said Wednesday.

The decision ends a three-meeting trend where Fed officials voted to cut rates by 25 basis points, but Powell had signaled the outcome in December at the central bank’s last meeting. Still, it comes after the disclosure of an unprecedented federal investigation into Powell that has raised questions about the institution's independence. 

“While the labor market has softened at the margins, the broader economy remains resilient, and inflation has not yet convincingly returned to long-term targets. In that environment, there is no urgent catalyst forcing immediate action,” Dwight Dunton, the CEO of multifamily investment platform Bonaventure, said in an email to Bisnow.

The members of the Federal Open Market Committee voted 10-2 to hold the target federal funds rate between 3.5% and 3.75%. 

Stephen Miran, a staunch advocate for rate relief who joined the Fed board in September, and Christopher Waller, who was appointed by President Donald Trump during his first term, both dissented and voted for a 25-basis-point cut.

The decision has both symbolic and practical implications, Dunton said.

“Absent a clear deterioration in economic conditions, staying on hold allows them to maintain credibility while preserving optionality for later in the year,” he said. 

Fed officials shifted the tone of their guidance released with Wednesday’s decision, describing the pace of economic growth as solid instead of moderate and saying that, while job growth remained low, there were signs of stabilization in the employment market.

Fed policy has assumed that President Donald Trump’s sprawling tariff regime would lead to transitory inflation, a one-time price increase that would eventually taper off. But the new levies haven’t yet fully worked their way through the economy, fueling elevated inflation that the central bank expects to wane sometime around the middle of the year.

“The expectation is that we will see the effects of tariffs flowing through goods prices, peaking and then starting to come down — assuming there are no new major tariff increases. And that's what we expect to see over the course of this year,” Powell said. “If we see that, that would be something that tells us that we can loosen some policy.”

Artificial intelligence investment is helping fuel economic growth, but Powell acknowledged that it could be a headwind for job growth as U.S. productivity grows while the job market cools. There is data to support anecdotal reports from recent college graduates that AI has supplanted some entry-level jobs, Powell said. 

“You hear large companies saying that they either won't be hiring for some time or that they're hiring less or they're laying people off, and they tend to refer to AI when they do that,” Powell said, although he added that AI wasn’t the main driver of changes to the job market. 

Futures investors at the start of this week had priced in a 97% likelihood that the Fed would hold rates steady Wednesday, according to CME Group’s FedWatch tool.

The central bank is charged with maintaining maximum employment and price stability. It cut rates at the last three meetings of 2025 after holding them flat throughout the year amid signs of a cooling labor market, even as the Fed remains far off its long-held 2% inflation target.

The core personal consumption expenditures price index, the Fed’s preferred metric for price growth, sat at 2.8% in November and rose to 3% in December, according to Powell. 

Wednesday’s decision is unlikely to have immediate impacts on commercial real estate markets, but the cumulative impacts of last year’s rate cuts have already spurred increased investment volume, several analysts told Bisnow. 

Powell’s term as chairman ends in May, and market participants expect monetary policy to loosen after his departure, not only because of political calculations but also due to economic shifts. 

“In the later half of 2026, with a new Fed chair and further weakening of the labor market, the Fed could reduce rates 2-4 times,” Paul Rahimian, CEO of bridge lender Parkview Financial, said in an email. “We understand that the market is projecting only 1-2 cuts, however we believe the data and a new Fed composition will dictate lower rates.”

The FOMC gathered to steer monetary policy as Washington and Wall Street reel from perceived political attacks on the Fed’s independence. 

Those tensions were simmering after Trump attempted to fire Fed Governor Lisa Cook in August amid a federal criminal investigation, a move that has made its way to the Supreme Court. But they boiled over in January when Jeanine Pirro, a former Fox News personality who now leads the U.S. attorney's office for Washington, D.C., approved an investigation into whether Powell lied during testimony to Congress about renovations of Fed offices. 

Powell issued a rare video statement after the investigation was disclosed, telling Americans the central bank was facing a political pressure campaign to loosen monetary policy.

Throughout the press conference, Powell repeatedly dodged questions from reporters asking about the political clouds hanging over the central bank, and he declined to say whether he will leave the FOMC after his chairmanship ends in May but before his term expires at the end of next year. 

Eventually, he spoke abstractly about the need for central banks to be seen as independent and acting in the best interest of the entire country and not any specific group. He said that credibility, if lost, would be difficult to gain back. 

“We haven't lost it. I don't believe we will. I certainly hope we won't,” he said. “But it's very important.”