FOMC Meeting Recap: Fed Chair Powell Deems March Rate Cut "Unlikely," Boosting Buck Toward YTD Highs

Federal Reserve Meeting Key Points

• The FOMC left interest rates unchanged in the 5.25-5.50% range and made no changes to its balance sheet plans, as expected
• The monetary policy statement was less dovish than expected, and Fed Chairman Powell emphasized that message by noting that a March rate cut was "unlikely"
• Jobs and inflation data will take on renewed significance after Powell said the Fed needs to see more, but not necessarily better data.

What was the Fed Interest Rate Decision?

The Federal Reserve’s FOMC left interest rates unchanged in the 5.25-5.50% range, as expected.

There were no changes to the central bank’s balance sheet plans.

This is the fourth consecutive meeting where the Fed left interest rates unchanged.

FOMC Monetary Policy Statement

For the first time in months, the FOMC made multiple substantive updates to its monetary policy statement. Among the most significant changes were the following:

• Removed references to the banking system’s resilience
• Noted that the risks to achieving its employment and inflation goals are “moving into better balance”
• Removed comments about “additional policy firming” and replaced them with a statement about “any adjustment” to interest rates.
• Noted that it doesn’t expect to cut interest rates until “it has gained greater confidence that inflation is moving sustainably toward 2 percent”

All told, these tweaks show that Jerome Powell and Company are considering the timing of shifting to interest rate cuts, but for a market that has been positioned for interest rate cuts to start at the next Fed meeting in March, these tweaks were less dovish than expected, suggesting that the interest rate cutting cycle may start later than many traders were anticipating.

Source: Federal Reserve, StoneX

Fed Chairman Powell’s Press Conference Recap

Fed Chairman Powell is still winding down his comments as we go to press, but so far he has struck a relatively balanced, data-dependent tone.

Highlights from his press conference follow (emphasis mine):

• THE POLICY RATE WELL INTO RESTRICTIVE TERRITORY.
• LONGER-TERM INFLATION EXPECTATIONS APPEAR WELL-ANCHORED.
• THE LABOR MARKET REMAINS TIGHT.
• LABOR DEMAND STILL EXCEEDS SUPPLY.
• OUR POLICY RATE IS LIKELY AT ITS PEAK.
• IT WILL LIKELY BE APPROPRIATE TO BEGIN REDUCING RATES SOMETIME THIS YEAR.
• IF THE ECONOMY EVOLVES AS EXPECTED, WE WILL DIAL BACK THE POLICY RATE THIS YEAR.
• I AM PREPARED TO MAINTAIN THE CURRENT POLICY RATE FOR LONGER IF NEEDED.
• REDUCING POLICY RESTRAINT TOO SOON OR TOO MUCH COULD REVERSE INFLATION PROGRESS.
• AT SAME TIME, REDUCING THE POLICY RATE TOO LATE COULD UNDULY WEAKEN THE ECONOMY.
• UNEXPECTED LABOR WEAKNESS WOULD WEIGH ON CUTTING SOONER
• THERE WAS NO PROPOSAL TO CUT RATES TODAY.
• A LOT OF THE ECONOMIC GROWTH WE ARE SEEING IS DUE TO POST-PANDEMIC HEALING,
• WHEN THAT PETERS OUT, OUR RESTRICTIVE RATE WILL SHOW UP MORE SHARPLY.
• IF INFLATION MOVES BACK UP, THAT WOULD BE A SURPRISE AT THIS POINT.
• I AM MORE CONCERNED THAT INFLATION WILL STABILIZE AT AN ELEVATED LEVEL.
• BASED ON THE MEETING TODAY, I DON'T THINK LIKELY WE WILL HAVE A RATE CUT IN MARCH.

It was shaping up to be another "ho-hum" press conference until toward the end, when the Chairman dropped the relatively explicit comment that he didn't think an interest rate cut at the central bank's next meeting in March was likely. While not an absolute pre-committal, waiting until May to start cutting interest rates would be later than almost any trader expected heading into the year, and it may set the stage for delays at other major central banks around the globe.

Post-Fed Market Reaction

After some early volatility on the seemingly more-dovish-than-expected monetary policy statement, most major markets were settling in near where their pre-Fed prices before Mr. Powell expressed skepticism over a March rate cut.

Now as we go to press, the US dollar is rallying by 30-50 pips against most of its major rivals, and major indices are trading at their session lows.

Ultimately, it remains to be seen whether economic data will continue to move in the direction the Fed hopes, but it's clear that inflation and jobs figures will be particularly significant over the next few months as the Fed dials in the exact timeline for starting its easing cycle.

-- Written by Matt Weller, Global Head of Research

Follow Matt on Twitter: @MWellerFX