Fed Expected to Keep Rates Unchanged   01/27 06:16

   

   WASHINGTON (AP) -- After two weeks of intense political and legal scrutiny, 
the Federal Reserve will seek to make this week's meeting about interest rates 
as straightforward and uneventful as possible, though President Donald Trump 
probably still won't like the result.

   The central bank's interest rate-setting committee is almost certain to keep 
its key short-term rate unchanged at about 3.6%, after three straight 
quarter-point cuts last year. Fed Chair Jerome Powell said after December's 
meeting that they were "well positioned to wait to see how the economy evolves" 
before making any further moves.

   When the Fed lowers its short-term rate, it can over time influence other 
borrowing costs for things like mortgages, auto loans and business borrowing, 
though those rates are also affected by market forces.

   This week's meeting -- one of eight the Fed holds each year -- will be 
overshadowed by the bombshell revelation earlier this month that the Justice 
Department has subpoenaed the Fed as part of a criminal investigation into 
testimony Powell gave last June about a $2.5 billion building renovation. It's 
the first time a sitting Fed chair has been investigated, and prompted an 
unusually public rebuke from Powell.

   Now, Powell will have to shift from a dispute with the White House to 
emphasizing that the Fed's decisions around interest rates are driven by 
economic concerns, not politics. Powell said Jan. 11 that the subpoenas were 
"pretexts" to punish the Fed for not cutting rates as sharply as Trump wants.

   Powell will be "under even more pressure to underscore, 'everything we're 
doing here ... is all about the economics,'" said Claudia Sahm, a former Fed 
economist and chief economist at New Century Advisors. "'We didn't think about 
the politics.'"

   Michael Gapen, chief U.S. economist at Morgan Stanley and also a former Fed 
staffer, said that despite the scrutiny, the Fed can be expected to consider 
its interest rate policies like it always does.

   "The meetings have a regular flow to them," he said. "There are 
presentations that are made, there are discussions that have to be had. ... 
Some of these other broader-based attacks on the Fed don't really come up."

   Not long after the Justice Department's subpoenas, the Supreme Court last 
week considered whether Trump can fire Fed governor Lisa Cook over allegations 
of mortgage fraud, which she denies. No president has fired a governor in the 
Fed's 112-year history. During an oral argument, the justices appeared to be 
leaning toward allowing her to stay in her job until the case is resolved.

   Other Fed officials have also signaled the central bank is likely to keep 
rates unchanged at their two-day meeting that ends Wednesday. The Fed's three 
rate cuts last year were intended to bolster the economy after hiring slowed 
sharply over the summer and fall in the wake of Trump's April tariffs on dozens 
of countries.

   Yet the unemployment rate ticked lower in December, after picking up for 
much of last year, and there are other signs the job market may be stabilizing. 
The number of people seeking unemployment benefits has stayed historically low, 
a sign layoffs haven't spiked.

   Meanwhile, inflation remains elevated and actually ticked higher last year, 
according to the Fed's preferred measure. Prices rose 2.8% in November from a 
year earlier, the latest data available. That is up from 2.6% in November 2024.

   Unless businesses start cutting jobs or the unemployment rate rises, the Fed 
is unlikely to cut rates again for at least a few months, economists say. If 
inflation slowly declines this year, as economists expect, the Fed may cut 
again in the spring or summer. Wall Street investors expect just two 
quarter-point rate reductions this year, according to futures prices.

   Many economists expect growth could pick up in the coming months, which 
would be another reason to forego rate cuts. Gapen estimates that tax refunds 
could be about 20% higher this spring than last year as the Trump 
administration's tax cuts take effect. Refunds could average $3,500, Gapen said.

   The economy expanded at a 4.4% annual rate in last year's July-September 
quarter and may have grown at a similarly healthy pace in the final three 
months of last year. If such solid growth continues, Fed officials will likely 
wait to see if hiring picks up as well, further reducing the need for more rate 
cuts.