FOMC Instant Reaction: Powell Threads the Needle, Longer Pause in Play?

FOMC Meeting Key Takeaways

The Fed left interest rates unchanged in the 4.25-4.50% range, as expected.
The monetary policy statement removed a reference to inflation making progress toward the 2% objective, but Chairman Powell emphasized the change was not a policy signal.
Markets ultimately saw little substantial movement as traders remain focused on tariff and AI developments as the dominant themes.

What was the FOMC Interest Rate Decision?

The Federal Reserve’s FOMC left interest rates unchanged in the 4.25-4.50% range, as expected.

There were no changes to the Fed’s balance sheet strategy.

FOMC Monetary Policy Statement

Beyond updating the current FOMC voting roster and updating for last month’s interest rate cut, there were several tweaks to the Fed’s monetary policy statement:

"The unemployment rate has stabilized at a low level"
Labor market conditions "remain solid"
Removed reference to inflation making “progress toward the 2% objective”

Source: StoneX

There are two potential interpretations of these changes: The more charitable, neutral reading is that the Fed is simply updating its statement to reflect the current reality that inflation has stopped falling for nearly a year now. The other, more hawkish interpretation is that Jerome Powell and Company are sending a policy signal that the pause on interest rate cuts may be more prolonged than expected, perhaps through at least the first half of the year or longer.

Fed Chairman Powell’s Press Conference

Chairman Powell is still winding down his comments as we go to press, but with most of the press conference behind us, Powell has sought to guide markets toward the first interpretation. Despite his insistence though, traders have still reduced the perceived likelihood of an interest rate cut in March from ~25% earlier this week to closer to 20% now.

Highlights from Powell’s press conference follow [emphasis mine]:

THE ECONOMY HAS MADE SIGNIFICANT PROGRESS TOWARD GOALS
INFLATION HAS MOVED MUCH CLOSER TO GOAL, SOMEWHAT ELEVATED
LABOR MARKET CONDITIONS BROADLY BALANCED
RISKS TO ACHIEVING GOALS ROUGHLY IN BALANCE, ATTENTIVE TO RISKS ON BOTH SIDES OF MANDATE
WE ARE NOT ON PRESET COURSE, WILL ADJUST POLICY STANCE TO PROMOTE GOALS
WE ARE FOCUSING ON REAL PROGRESS ON INFLATION OR WEAKNESS IN THE LABOUR MARKET BEFORE MAKING FURTHER CUTS
SENTENCE ON INFLATION NOT MEANT TO SEND SIGNAL
FED VERY MUCH WAITING TO SEE WHAT POLICIES ARE ENACTED
HAVE NOT HAD CONTACT WITH THE PRESIDENT
WE DON'T NEED TO BE IN HURRY TO ADJUST POLICY STANCE
THE FED DOESN'T ACT UNTIL SEEING MUCH MORE THAN WE SEE NOW
NOW SEE SHELTER INFLATION COMING DOWN PRETTY STEADILY
THERE SEEMS TO BE SET UP FOR FURTHER PROGRESS ON INFLATION; WE ARE GOING TO WANT TO SEE IT
WE WANT SERIAL READINGS SUGGESTING INFLATION PROGRESS
WE ARE ABOVE EVERYONE ON COMMITTEE'S ESTIMATES OF LONG-RUN NEUTRAL
DON'T WANT TO BE SPECULATING ABOUT TARIFFS; RANGE OF POSSIBILITES OF WHAT HAPPENS WITH TARIFFS IS VERY VERY WIDE
WE INTEND TO REDUCE THE BALANCE SHEET SIZE
LONGER RATES HAVE GONE UP NOT BECAUSE OF EXPECTATIONS ABOUT POLICY OR INFLATION
WE DON'T NEED TO WAIT FOR 2% INFLATION TO CUT RATES

FOMC Market Reaction: Ho-Hum

The initial market reaction to the FOMC decision reflected the more “hawkish” interpretation of the statement’s assessment of inflation, with yields and the US dollar rising while stocks fell. However, as we go to press, those moves have reversed on the back of Powell’s emphasis that the tweaks were not meant to send a policy message, with the US dollar, yields, and US indices all essentially unchanged

Ultimately, the Fed is likely to be on hold for the next couple of months at a minimum, and narratives around tariffs and AI are the dominant theme for now, so the lack of a meaningful market reaction isn’t particularly surprising.

-- Written by Matt Weller, Global Head of Research

Check out Matt’s Daily Market Update videos on YouTube and be sure to follow Matt on Twitter: @MWellerFX

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