The Federal Reserve held its benchmark lending rate steady following a two-day policy meeting in Washington, but it removed a reference to making progress on slowing inflation, which could signal a longer time frame before the next move lower.
The central bank, as expected, made no changes to its key Federal Funds Rate, which sits in a range between 4.25% and 4.5% following a quarter-point reduction in December.
"Recent indicators suggest that economic activity has continued to expand at a solid pace," the Fed said in a statement released alongside the rate decision. "The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated."
"In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks," the statement added.
U.S. stocks extended declines following the Fed decision and statement, with the S&P 500 last marked 49 points lower on the session and the Nasdaq down 214 points. The Dow Jones Industrial Average was last marked 232 points lower.
Inflation pressures linger
Benchmark 10-year Treasury note yields rose 2 basis points to 4.577%, with 2-year paper trading 6 basis points higher on the session at 4.265%.
The U.S. dollar index, which tracks the greenback against a basket of six global currencies rose 0.14% to 107.071.
"The Fed removed previous comments that inflation was 'making progress towards the 2% goal', suggesting that inflation risks are tilting to the upside," said George Lagarias, chief economist at Forvis Mazars.
"Usually, the markets concentrate on the comments by the Fed Chair, to gauge whether the Fed will adopt a hawkish or a dovish stance going forward," he added. "This time around, however, Jerome Powell’s words might mean less to investors who will be more focused on possible reactions from the Oval Office."
Inflation pressures remain stubbornly above the Fed's stated 2% target, with the December CPI pegged at an annual rate of 2.9%, the highest of the year, even as domestic gasoline prices declined 1.1%.
Core inflation, however, eased for the first time since July, and was pegged at 3.2%, in what some analysts and investors saw as an early indication that the Fed could resume its policy easing into the new year.
Related: Inflation, debt limits reset bond market risks
December retail sales were also mixed, with headline activity rising 0.4% to a collective tally of $729.2 billion, while the closely tracked control-group number, which feeds into the government's GDP calculations, rose 0.7%
However, recent economic data suggest slowing growth momentum into the new year.
S&P Global's final reading of December business activity slowed to the lowest level since April. The Atlanta Fed's GDPNow forecasting tool estimated the fourth-quarter advance at 2.3%, a notable downgrade from its 3.2% forecast earlier in the week.
Trump's tax, tariff plans in focus
President Trump's tariff proposals, however, as well as the impact of breaching the U.S. debt ceiling and the unfunded tax cuts planned by the new Republican-controlled Congress, could stoke inflation pressures into the new year and beyond.
Rate traders are now betting that the Fed won't likely lower its lending rate until at least June, and they have pared bets on a follow-on move until the central bank gets more clarity on Trump's tax and tariff proposals.
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"Positive inflation trends offer little motivation for aggressive Fed action as disinflation slows," said Boris Kovacevic, global macro strategist at Convera.
"Policymakers are likely to maintain steady rates, pausing the easing cycle initiated in September due to trade tensions and AI-related selloffs."
"A strong US economy, affected by tariffs, would need a significant global downturn to lead the Fed to turn dovish in early 2025," he added. "The Fed’s approach will influence whether the current pause results in stability or a return to easing this year."
Related: Veteran fund manager issues dire S&P 500 warning for 2025
