Fed Holds Rates Steady As Political Pressure Overshadows Policy Decisions

The Federal Reserve held its benchmark interest rate steady Wednesday in a target range of 3.5% to 3.75%. The decision was widely expected as little has changed since December in the balance of risks tied to its dual mandate of maximum employment and price stability, economists said.

Heading into the meeting, politics drew more attention than monetary policy.

The Department of Justice (DOJ) opened an investigation into the Fed and Chair Jerome Powell related to a $2.5 billion renovation of the central bank’s Washington, D.C., headquarters. At the same time, the Supreme Court heard arguments tied to President Donald Trump’s effort to remove Fed Governor Lisa Cook for cause due to mortgage fraud allegations, while Trump himself said he is close to announcing a new Fed chair.

On the economic front, inflation was flat in December, rising 0.3% month over month after seasonal adjustments. Year-over-year inflation growth of 2.7% was unchanged from November. The labor market also continued to cool, with the economy adding just 50,000 nonfarm payroll jobs in December. November’s preliminary estimate was revised downward by 8,000 and totaled 56,000 jobs.

 “The Fed is on hold but remains data dependent,” Bank of America analysts wrote Monday. “The balance of risks around the two mandates hasn’t changed much since December.”

Realtor.com senior economist Jake Krimmel said legal and political pressure from the Trump administration, court proceedings and renewed debates over Fed independence — rather than any expected policy shifts — have dominated the narrative. Still, he said, “the central bank has consistently signaled that the road to maintaining credibility requires that policy decisions remain solely data-driven.”

Krimmel noted that inflation remains above the Fed’s 2% target, while the job market is in a “low-hire, low-fire state,” suggesting the economy remains resilient despite moderately restrictive rates. That “further bolsters the case for a pause,” he said.

The road ahead

The Fed delivered three straight 25-basis-point cuts in September, October and December. Looking ahead to 2026, market participants expect additional cuts, with some betting they could begin as early as April. Mortgage industry experts, however, expect 30-year fixed rates to remain in the 6% range.

“Investors are trying to understand the path forward for rate cuts later this year, with only a one-in-three chance of a cut priced in by April and stronger odds pointing toward June or July,” Jeff DerGurahian, loanDepot‘s chief investment officer and head economist, said in a statement.

“The bigger wild card is who will be nominated as the next Fed chair, as expectations have shifted towards Rick Reider, Blackrock’s CIO of Global Fixed Income, being the frontrunner.”

Kevin Hassett, director of the White House National Economic Council, was reportedly the leading candidate, but Trump recently indicated that he’d like to keep Hassett in his current role.

Investors will closely watch labor data coming in the first week of February, DerGurahian said.

“Headlines about layoffs at major companies like Amazon and Citi suggest some softening in the labor market, and the tone of that data could shift how markets are thinking about growth and inflation. This employment cycle, not the Fed meeting, is most likely the key catalyst for mortgage rates breaking out of their current range and dip below 6%.”  

First American senior economist Sam Williamson said the pause should not be interpreted as the end of the easing cycle.

“Last year’s cumulative cuts give officials room to move more deliberately, while monitoring incoming data and broader financing conditions,” Williamson said. “If inflation continues to ease in a sustained way or if economic growth weakens more than expected, additional reductions later this year remain possible.”

According to the CME Group‘s FedWatch tool, markets are pricing in a 26.8% probability of a 25-bps cut in April and a 47.6% probability in June.

“With policymakers signaling a higher threshold for further easing, rate cuts may come later in the year and could ultimately be fewer, especially if economic growth firms as fiscal support and earlier easing bolster activity and help stabilize the labor market,” Williamson said. “That could leave 30-year, fixed mortgage rates in the low-6% range, drifting down only gradually throughout the year.”

Realtor.com’s Krimmel added that the past 10 days underscore the Fed’s limited influence over mortgage rates.

“Expectations around the Fed’s policy rate haven’t changed and yet mortgage rates moved sharply down and then back up, first in response to a cash infusion in the mortgage-backed securities (MBS) market and then due to rising risks seen in long-term bond markets.”