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Fin-X Pulse: Fed Keeps Interest Rate Policy Unchanged

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Keeping policy unchanged, the Chair of the Federal Reserve provided an assessment of the outlook before the impact of any White House policy changes. Interest rate markets were essentially unmoved.

  • The Federal Reserve held the Federal Funds rate at 4.25% - 4.50% last night and maintained the pace of balance sheet reduction (quantitative tightening).

  • The opening paragraph of the official statement was changed from December's: "Recent indicators suggest that economic activity has continued to expand at a solid pace. Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee’s 2 percent objective but remains somewhat elevated", 

  • to January's shorter: "Recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated".

  • In prepared remarks, Chair Powell added: "The economy is strong overall and has made significant progress toward our goals over the past two years. Labor market conditions have cooled from their formerly overheated state and remain solid. Inflation has moved much closer to our 2 percent longer-run goal, though it remains somewhat elevated".

  • The FOMC continues to see the stance of monetary policy as appropriately restrictive and judges that they can afford to be patient. He only outlined scenarios where rates would be held or cut in the coming months: "If the economy remains strong and inflation does not continue to move sustainably toward 2 percent, we can maintain policy restraint for longer. If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we can ease policy accordingly. Policy is well positioned to deal with the risks and uncertainties that we face in pursuing both sides of our dual mandate".

  • He was reasonably confident that shelter and non-market service prices would continue to bring inflation back towards the 2% target in 2025.

  • During questions, he characterised the labour market as a "low hiring environment" and said that "we don't need it to cool off any more [...] Overall the labour market does seem to be pretty stable and in balance". 

  • He acknowledged the uncertainties related to tariffs, taxes, immigration and regulation.

  • It was highlighted that the Bank of Canada cut by -0.25% last night, partly in response to anticipated tariffs. Chair Powell responded that the Fed was not speculating on the timing or extent of tariffs. He did say that the circumstances were different from 20218. During the recent bout of higher inflation, companies clearly liked to raise prices. At the same time, consumers had enough of price rises, so it was difficult to judge how it would play out. "The range of possibilities is very wide".

  • After President Trump said he would demand interest rate cuts at the World Economic Forum, Chair Powell would not be drawn into a response, or on any other question related to the executive, energy or fiscal policy.

  • He dismissed the recent stock market volatility as anything that required a response, being more focused on the macroeconomic outlook.

  • S&P500 6,039 -0.5%, Nasdaq Comp. 19,6322 -0.51%, S&P/ASX200 future 8,416 -0.1%,

  • US 2yr 4.21%  +2bps, US 10yr 4.53% (unch)

  • US dollar (DXY) index 107.98 +0.1%, AUDUSD 0.6231 -0.4%, Gold US$/oz 2,757 -0.3%

Fin-X Wealth View

  • Chair Powell gave a fairly clear indication that monetary policy is perceived as restrictive for now and that it would likely need to be less restrictive in the future.

  • That could happen either by cutting rates in response to a weaker labour market or by inflationary pressures building. It seems he thinks the former is more likely. Short-term inflation expectations have risen, requiring a more hawkish stance, but long-term inflation expectations appear to be sufficiently well-anchored. There was little suggestion, if any, of an acceleration in economic growth.

  • The economy is finely balanced and the FOMC will react to any concrete policy announcements. If this week's back-and-forth between executive decrees and court challenges continues, we can expect more volatility across interest rate, currency, and equity markets.

  • For now, market pricing of the Fed Funds rate remains stable. There are two -0.25% cuts priced in by the end of 2025 and only one more in late 2026.


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