U.S. FOMC Meeting (January 28-29, 2025)

Fed pauses rate cut cycle as tariffs loom large

• The Federal Reserve Open Market Committee (FOMC) maintained the federal funds rate in the 4.25% to 4.50% range and announced it would continue its balance sheet runoff. 
  
• The Fed justified its decision to hold rates steady by highlighting that the economy "continued to expand at a solid pace", while inflation still remains "somewhat elevated". 
  
• On the future path of policy, the statement shows that the Fed thinks risks are roughly balanced. There was no mention of risks coming from Trump tariffs nor how it would respond should a worst-case scenario unfold.
  
• All of the members of the FOMC voted in favor of the decision.

Key Implications

• A policy rate pause was always expected today. The more pressing question relates to how the Fed's outlook has changed following a flurry of President Trump's executive orders and under the threat of tariffs to various countries. The policy statement failed to touch on this. We look to see if Chair Powell can shed more light on this during his presser. 
• Markets are expecting the Fed to remain on hold through the spring. While the President's policies have had an impact on Fed pricing, the strength of the economy remains the main driver. The Fed benefits from strength in consumer spending and jobs, alongside wage gain stabilization. Inflation has also been more restrained, with the Fed's preferred core PCE index running at 2.5% on a three-month annualized basis. Solid growth and stable inflation mean that the bar for rate cuts is high. Unless we start to see weaker U.S. economic growth, we expect the Fed to remain on the sidelines.     

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