The Federal Reserve has opted to keep its benchmark interest rate unchanged in its first policy decision of 2025, maintaining the federal funds rate at 4.25%–4.50%. This marks a pause in the Fed’s short-lived rate-cutting cycle, which began in late 2024. The decision aligns with market expectations and reflects ongoing concerns about inflation and labor market strength.

Why Did the Fed Pause Rate Cuts?

The Fed operates under a dual mandate of maintaining price stability and full employment. While the labor market remains strong, inflation has shown signs of persistence.

The U.S. economy added 256,000 jobs in December, far exceeding expectations and pushing the unemployment rate down to 4.1% from 4.2% in November. This robust job market has provided the Fed with the flexibility to hold off on further rate reductions.

Meanwhile, inflation has started to pick up again. December’s consumer price index (CPI) showed a 2.9% increase for 2024, with monthly price gains accelerating to 0.4%. This marks the third consecutive month of rising inflation, now at its highest level since July 2024. Given these inflationary pressures, the Fed appears cautious about loosening monetary policy too quickly.

Market Expectations for Future Rate Cuts

Traders and analysts anticipate that the Fed will hold rates steady for the near future. Probability markets suggest a potential rate cut in June, with another reduction possible by the end of the year. The Fed’s December projections indicated an expectation of two rate cuts in 2025, but those forecasts could change if inflation remains stubbornly high.

DXY Technical Outlook: Strength Above 108.00, But Caution Persists

The U.S. Dollar Index (DXY) has held above the 108.00 level, showing resilience ahead of the Fed’s policy decision. However, technical indicators suggest a cautious outlook. The Relative Strength Index (RSI) remains below 50, signaling limited bullish momentum, while the MACD continues to show red bars, indicating selling pressure.

If DXY sustains its position above 108.00, further gains toward 108.50 are possible. However, a break below 107.50 could trigger additional downside movement, reinforcing market uncertainty about the Fed’s future policy path.