The Federal Reserve decided to keep the rates unchanged at 4.5% in their meeting on Jan 29, 2025. This move was widely anticipated and markets were not affected much by this move. The US stock market trends revealed that indices and treasury yields were relatively unchanged.
Let us see what this means for the future direction of interest rates and why markets were so sure that the Federal Reserve would not cut the rates.
Federal Reserve Policy decision
The US central bank, the Federal reserve convenes roughly every 45 days to set the policy rates. This meeting takes place eight times each year. The first meeting of 2025 took place on 29th January 2025 in the US. January 2025, Fed meeting outcome was to keep the rates unchanged at 4.5%.
Prior to this the rates hovered at 5.5% for 14 months before the Fed decided to cut rates in its September 2024 meeting, thus bringing down the rates to 5%. After that Feb cut rates for two consecutive months (November and December) by 25 basis points (0.25%) each bringing the rates down to 4.5%.
Also read: Different types of inflation: How does it impact your finances?
Rationale behind Fed’s Decision
The decision for changing the interest rates are based majorly on two factors: the US inflation and Non- farm payrolls data (jobs added). The Fed does a balancing act between these two data points. They neither want the inflation too high and Non farm payrolls too low. Because if they try to tame inflation the jobs growth will fall rapidly and if they try to focus only on jobs growth it would induce rampant inflation.
The December 2024, year-on-year inflation rate in the US was 2.9%, that is way above the Fed’s target rate of 2%. The non farm payroll addition or job addition in the month of December was at 256,000 more than the expectations of 160,000.
These data points were enough for the market participants to conclude that the Federal Reserve would most likely keep the rates the same and would wait for more inflation and non-farm payroll data to make a decision.
Market’s Reaction to the decision
The markets were already anticipating the Fed interest rate decision that the Fed will not cut rates, and as a result of that, the stock market was comparatively stable. Usually, there is high volatility around the fed decisions but this time the markets did not react much.
The Dow Jones industrial average closed 0.31% lower at 44,713.52, and the S&P 500 was down 0.47% and closed at 6,039.31. This shows that market participants were already predicting this move.
On January 29,2025, the bond yields on the US 10Y bonds were up 0.006% and closed at 4.544%. The yields also were almost unchanged after the Fed’s decision.
Also read: Interest rate risk – Meaning and risk management strategies
US Policy rates: Path ahead
The CME group’s FedWatch tool is used worldwide to understand the market expectations of future Fed policy. This tool uses the bond market activity to gauge the expectations of the market participants. As per the Fedwatch tool the market participants are not expecting the rates to remain at 4.5% until June 2025.
| Fed Meeting | 4.5% | 4.25% | 4% | 3.75% | 3.5% |
| 19th March 2025 | 82% | 18% | – | – | – |
| 7th May 2025 | 55.4% | 38.8% | 5,8% | – | – |
| 18th June 2025 | 28.3% | 46.9% | 21.9% | 2.9% | – |
| 30th July 2025 | 22.5% | 43.1% | 27.1% | 6.8% | 0.6% |
| 17th Sep 2025 | 15.1% | 36.3% | 32.3% | 13.4% | 2.6% |
| 29th October 2025 | 12.2% | 32.2% | 33.1% | 17.1% | 4.7% |
| 10th Dec 2025 | 9.8% | 28.4% | 32.9% | 20.2% | 7.1% |
Source: Fedwatch tool (30th Jan 2025)
(*Highlighted values show highest expectations for a particular rate)
For the next meeting, 82% of participants are expecting that the rates will remain stable at 4.5%. This data also suggests that as of January 2025, market participants are only expecting two rate cuts of 25 basis points each (0.25%) in the entire 2025.
This data is not an exact prediction, but an estimate depending on current conditions of the US bond market. This data can change rapidly with changes in the economic conditions.
Fed’s Policy Path: Key Considerations
The Fed Chairman Powell says that the Fed wants further confirmation that inflation is under control before lowering the rates any further. For this reason the Fed tracks a number of economic indicators.
Market participants also believe that the Trump Administration’s policies such as mass deportations and imposing tariffs on foreign trading partners can trigger inflation in the short term. Mass deportations can induce wage inflation since illegal immigrants make up a significant amount of the US workforce.
The market participants believe that the Federal reserve will cut rates when it is confirmed that the inflation is under Fed’s target rate of 2%. Any major policy change by President Trump that triggers inflation can delay rate cuts.
Also read: How does the US Fed’s interest rate pause impact global markets and India?
Bottomline
The Fed interest rate decisions depend on a lot of data. The Federal Reserve is independent of the US government, and its decisions are unpredictable. Sometimes, the Federal Reserve surprises the markets with its moves. Instead of trying to predict the immediate Fed actions, beginners must focus on learning what long term impacts will the interest rate decisions have on the US stock market trends .
