The Federal Reserve paused its rate-cutting campaign Wednesday, holding its benchmark interest rate at 3.5% to 3.75% after three consecutive cuts. But the decision was far from unanimous, with two officials breaking ranks in a rare display of division that underscores the difficult position facing the central bank.
Fed Governors Chris Waller and Stephen Miran dissented from the majority, voting instead for an additional quarter-point rate cut. The split is particularly significant given Waller’s status as one of President Trump’s finalists to replace current Fed Chair Jerome Powell, whose term expires in May. Waller has expressed ongoing concerns about weakness in the labor market, suggesting the Fed risks waiting too long to provide additional support.
The disagreement comes as the Fed navigates conflicting economic signals. Officials upgraded their economic assessment to “solid” from “moderate,” pointing to strong GDP growth in recent quarters. They also softened their language on employment risks, removing previous warnings that “downside risks to employment rose in recent months.” The committee now simply states it remains “attentive to the risks to both sides of its dual mandate.”
Yet the underlying data tells a more complicated story. December payroll growth remained weak, though the unemployment rate did improve to 4.4% after ticking up in November. The Fed had cut rates three times last year specifically to cushion soft job numbers, making the current pause a bet that those cuts have already done enough.
Inflation remains the stickier problem. Core Consumer Price Index inflation held at 2.6% in December, unchanged since September. The Fed’s preferred inflation gauge—core Personal Consumption Expenditures—registered 2.8% in November, well above the central bank’s 2% target. That reading was delayed due to lingering effects from last fall’s government shutdown.
These persistent inflation readings complicate any argument for additional rate cuts, even as some officials worry about labor market deterioration. The Fed’s statement emphasized that future decisions will depend on “incoming data, the evolving outlook, and the balance of risks,” keeping all options on the table without providing clear forward guidance.
The rate hold also comes amid unprecedented tensions between the White House and the Fed. Trump has repeatedly called for lower interest rates, and the relationship between the administration and the central bank has deteriorated sharply. Powell revealed earlier this month that the White House has opened a criminal investigation into testimony he gave last summer regarding the Fed’s headquarters renovation—an extraordinary move that raises serious questions about central bank independence.
Trump is expected to name Powell’s replacement soon, adding another layer of uncertainty to an already murky policy outlook. The criminal probe appears designed to undermine Powell’s credibility as his term winds down, representing a level of political interference rarely seen in the Fed’s modern history.
For markets, the split vote and political pressure signal continued uncertainty ahead. The Fed faces no easy path forward: cut rates too aggressively and inflation could accelerate, but wait too long and employment could weaken further. With leadership changes looming and political tensions escalating, investors should prepare for a bumpy road as the central bank tries to navigate these crosscurrents while maintaining its independence.
