But now, the question is when will the committee issue its first rate cut of the cycle?
In a statement, the committee said it "does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward" the Fed's 2% inflation target.
At a news conference following the announcement, Fed Chairman Jerome H. Powell said that while recent inflation data has been encouraging, "We need to see more" in order to feel comfortable cutting rates.
The lower inflation readings over the second half of last year are welcome, but we will need to see continuing evidence to build confidence that inflation is moving down sustainably toward our goal," Powell added.
In December, committee members signaled multiple cuts this year. Its median projection for the federal funds rate at the end of 2024 was 4.6% in December, down from the 5.1% it forecast in September; for the end of 2025, it projected 3.6%, down from the 3.9% it forecast in September.
The Fed chair said the committee hasn't made any decisions about potential cuts and will continue to assess incoming data when making decisions.
The data the Fed is evaluating includes the consumer price index, which rose an annualized 3.4% from a year earlier in December, above economic forecasts, and also above the 3.1% figure recorded in November, the Bureau of Labor Statistics reported Jan. 11.
Separately, the core personal consumption expenditures price index, the Fed's preferred inflation gauge, rose 2.9% year over year in December, the smallest increase since March 2021, according to data released Jan. 26.
All the while, the unemployment rate remains low at 3.7% and the U.S. gross domestic product increased at an annual rate of 3.3% in the fourth quarter, exceeding expectations.
"We believe that our policy rate is likely at its peak for this tightening cycle and that if the economy evolves broadly as expected it will likely be appropriate to begin dialing back policy restraint at some point this year," Powell said. "But the economy has surprised forecasters in many ways since the pandemic and ongoing progress toward our 2% inflation objective is not assured."
Shortly after the Jan. 31 announcement, market participants indicated there was a 55% probability that the Fed will initiate a quarter-point rate cut at its next meeting, according to the CME FedWatch Tool that tracks trading in the 30-day fed funds futures.
The committee's next meeting is March 19-20.