The Fed held rates steady at 4.25-4.50 %, signaling caution amid strong US growth and elevated inflation. Meanwhile, the ECB is facing pressure to cut rates further as the eurozone economy weakens. The euro fell to 1.04.
At its January meeting, the Federal Reserve decided to leave interest rates unchanged in the 4.25-4.50 % band, in line with market expectations.
After three consecutive rate cuts totalling one percentage point, US central bank policymakers decided to hit the brakes at the first meeting since the Trump administration took office.
The US economy remains resilient and the labour market is strong. However, inflation is still considered "somewhat elevated", prompting the Fed committee to reiterate the cautious approach outlined in December: "In considering the scope and timing of further adjustments to the target range for the federal funds rate, the Committee will carefully consider incoming data, the evolving outlook, and the balance of risks."
The timing and magnitude of any further rate cuts will essentially depend on economic data and emerging risks - an idea that raised concerns among market participants last month.
The Fed continues to exercise caution and has decided to assess economic developments before implementing further monetary easing - a luxury not available to the European Central Bank, which is facing growing pressure to cut rates more aggressively.
Policy divergence between the Fed and the ECB is widening
In December, the Fed surprised the markets by raising its inflation forecast for 2025 to 2.5 % and lowering its projection of interest rate cuts to just two for this year, down from four in the September forecast.
Fed Chairman Jerome Powell stressed that rates were close to the neutral level and that further cuts should be approached very cautiously.
While the strength of the US economy and persistent inflation keep Fed policymakers on their toes, the situation in Europe is markedly different: the economic outlook is deteriorating and inflation is steadily advancing towards the 2% target.
On Wednesday, the German government cut its economic growth forecast for 2025 to just 0.3 %, down from the previous estimate of 1.1 1 % in October.
Minister for Economic Affairs Robert Habeck described the economic situation as "difficult" and warned that stagnation has persisted for a long time, exacerbated by labour shortages, excessive bureaucracy and insufficient public and private investment.
Market expectations currently point to two Fed rate cuts in 2025, starting in June, while the ECB is expected to make four rate cuts by the end of the year.
Euro weakens to 1.04 ahead of Powell's report
Following the Fed's decision and ahead of Powell's press conference, the euro fell to 1.04 against the US dollar, reflecting the strength of the greenback amid growing differences in monetary policy between the two economies.
Powell is also likely to face questions about renewed efforts to Donald Trump to influence the Fed's decision-making.
Speaking via videoconference at the World Economic Forum last week, the US president-elect explicitly said he would push for lower interest rates, a stance that could increase political pressure on the central bank in the coming months.
euronews/ gnews - RoZ
PHOTO - Facebook
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