Fed Holds Rates, Signals No Rush to Start Cutting 

The Federal Reserve Open Market Committee (FOMC) maintained the federal funds rate in the 5.25% to 5.50% range and announced it would continue its balance sheet runoff.

The Fed adjusted its language to acknowledge the recent strengthening in economic data, stating “recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have moderated since early last year but remain strong.”

With inflation having decelerated in the last few months, the statement added that inflation risks are “moving into better balance.”

On the future path of policy, the statement added that “the Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent”.

All of the members of the FOMC voted in favor of the decision.

Key Implications

We were all keenly attuned to how Chair Powell would change his tone in response to the recent improvement in U.S. inflation. The Fed’s preferred core PCE metric has moved to 2.9% year-on-year, with the 3-month annualized figure having moved below the Fed’s 2% target (at 1.5%) in December. Powell noted the improvement but highlighted that “ongoing progress is not assured”. The need for further evidence that inflation will move to stabilize at 2% was the main theme of Powell’s presser today.

Powell’s desire for further proof of inflation’s trajectory hasn’t stopped markets from maintaining 50/50 odds of a cut in March. We believe this timing is premature. While the trend in inflation has been encouraging, the strength of the U.S. economy has given the Fed a free option to wait longer before it cuts rates. Given this economic strength, and with global supply chain issues popping up again, there is risk that inflation could surge higher. This argues for greater patience – a sentiment echoed by Powell as he leaned against market pricing for earlier rate cuts.