In a move that was hardly surprising, the Federal Open Market Committee (FOMC) today left the target range for the fed funds rate unchanged at 4.25% to 4.50%. While revisions to the post-meeting statement initially prompted hawkish moves in Treasury yields, they were largely undone by later press conference announcements that painted the current policy stance as “well-positioned” to deal with risks and uncertainties facing both sides of the dual mandate.
In the FOMC policy statement, changes were made to the committee’s assessment of the labor market and incoming inflation data. Language was added to describe the unemployment rate as having “stabilized at a low level” after the modest rise seen over the summer, and overall labor market conditions were described as “solid.” On the inflation front, the previous acknowledgement of “progress” appearing in the December statement was removed, leaving only language that characterized inflation as remaining “somewhat elevated.”
At today’s press conference, Federal Reserve (Fed) Chair Powell was directly questioned about the statement changes and whether the Fed still believed that real progress had been made on inflation. In response, Powell insisted that the revisions were merely meant as “language cleanup” resulting from the passage of time, rather than a means of signaling any material update in the outlook. He went on to say that recent inflation data for November and December were “good readings” and that “we seem to be set up for further progress,” especially regarding shelter inflation. When asked about his assessment of how far policy rates are from neutral, Powell went on to say that current levels are above “pretty much everyone” on the committee’s estimate of neutral, and that the effects of restrictive policy can be seen in housing and in the labor market.
On multiple occasions during the press conference, Powell asserted that the current state of the economy, labor market and inflation mean that the FOMC is “in no hurry” to adjust the policy stance from here. He did his best to reiterate that the FOMC remains data dependent. Without going into too much detail, he added that additional uncertainty around tariffs, immigration, fiscal policy and regulatory policy expand the possible range of outcomes.
At Western Asset, we acknowledge that economic resilience, modestly above-target inflation, stabilization in the labor market and an uncertain Trump 2.0 agenda portend the possibility of a Fed on hold for multiple meetings. That said, we maintain the view that interest rate hikes from here remain a remote possibility and that by the middle of 2025, the FOMC should have the requisite inflation data in hand to resume the cutting cycle.