The Fed’s January pause reflects a balancing act—assessing the impact of prior easing while navigating growth resilience and new inflation risks. While rate cuts remain likely given still-restrictive policy and ongoing economic fragilities, Trump administration policy uncertainty could cloud the picture. With no urgency to move, the Fed is keeping its options open, making the path ahead highly uncertain.
Following three consecutive rate cuts, the FOMC has paused its policy easing cycle. While the path ahead for rates is clouded by uncertainty around the Trump administration’s policies, the bias is still for further cuts.
The case for a more cautious and measured Fed is strong. In Q4 2024 the U.S. economy grew 2.3%, slightly above trend, so the immediate need for further policy loosening is not obvious. The Fed also needs to wait and see how the 100bps of policy easing already delivered impacts the economy.
Furthermore, the Fed needs to be alert to the inflation risks stemming from proposed tariff policies. Estimates of the potential inflation impact range from a 0.5% to 2% increase, and while central banks typically look through one-off increases from tariffs, they must be mindful of the risk that inflation expectations start to drift higher.
Yet, despite these uncertainties, the hurdle for a rate hike remains elevated even as the Fed retains an easing bias. Chair Powell stated that, even after 100bps of easing, policy rates are meaningfully restrictive, and they expect inflation progress to eventually resume—they just aren’t sure when. Crucially too, with tentative fragilities still present in low-income households, small businesses and manufacturing, additional interest rate relief will likely be required.
Further policy loosening is likely this year but, without any urgency to cut, the timing of those moves is particularly uncertain.
Disclosure
Investing involves risk, including possible loss of Principal. Past Performance does not guarantee future return.
The information presented has been derived from sources believed to be accurate; however, we do not independently verify or guarantee its accuracy or validity. Any reference to a specific investment or security does not constitute a recommendation to buy, sell, or hold such investment or security, and does not take account of any investor’s investment objectives or financial situation and should not be construed as specific investment advice, a recommendation, or be relied on in any way as a guarantee, promise, forecast or prediction of future events regarding an investment or the markets in general. The opinions and predictions expressed are subject to change without prior notice.
Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc.
Securities are offered through Principal Securities, Inc., 800-547-7754, Member SIPC and/or independent broker/dealers.
Principal Asset Management leads global asset management at Principal.®
For Public Distribution in the U.S. For Institutional, Professional, Qualified and/or Wholesale Investor Use only in other permitted jurisdictions as defined by local laws and regulations.
© 2025, Principal Financial Services, Inc. Principal Asset ManagementSM is a trade name of Principal Global Investors, LLC. Principal®, Principal Financial Group®, Principal Asset Management, and Principal and the logomark design are registered trademarks and service marks of Principal Financial Services, Inc., a Principal Financial Group company, in various countries around the world and may be used only with the permission of Principal Financial Services, Inc.
4206443
About the author
Chief Global Strategist
Seema Shah