Despite pressure from newly elected President Trump to immediately lower interest rates just days ago, the Federal Reserve still decided to keep rates unchanged this week, with Chairman Powell clearly indicating that there is no rush to adjust rates.
Right after Powell's press conference, Trump once again criticized the Federal Reserve. He wrote on Truth Social,
“Because Powell and the Federal Reserve failed to stop the inflation problem they created, I will address this by unleashing U.S. energy production, cutting regulations, rebalance international trade, and revitalizing American manufacturing.”
“If the Federal Reserve spent less time on DEI (Diversity, Equity, and Inclusion), gender ideology, 'green' energy, and false climate change, inflation would never be a problem.”
He did not directly comment on interest rates or Wednesday's decision. Trump has a habit of publicly expressing his views on monetary policy since his first term. To maintain the Federal Reserve's independence from political influence, past U.S. presidents have typically avoided publicly stating their views on monetary policy.
In a post-meeting statement, officials reiterated that inflation remains 'a bit high,' but removed references to progress being made towards the 2% target. Powell stated that this change was not intended to signal a shift in policy. Federal Reserve policymakers also updated their description of the labor market, replacing 'somewhat slowing' with 'strong.'
Powell stated at the press conference following the statement release that recent inflation data looks 'good,' but 'we will not overinterpret two good or two bad (inflation) data points.'
Earlier on Wednesday local time, before Trump's post, he told reporters that he would not comment on 'the President's remarks on interest rates.' 'The public should trust that we will continue to work as we have always done.'
Powell said he has had no direct contact with Trump. 'A lot of research shows that (independence) is the best way for central banks to operate,' he added.
The Federal Reserve is now in a wait-and-see mode, with officials waiting for more clarity on inflation and employment data as well as the impact of President Trump's policies. Market expectations for rate cuts from the Federal Reserve in 2025 are declining. According to CME's FedWatch, the probability of the Fed holding rates steady in March is 82%.
Institutional Interpretation
George Cipolloni, Portfolio Manager at Penn Mutual Asset Management:
“The latest policy statement was initially interpreted as more hawkish than expected. They will wait a while to see what inflation does, which may not be the worst idea in the world, as they do not want to overadjust policy. I think they overshot a bit by cutting rates by 100 basis points last year.”
“Thus, the Federal Reserve's policy outlook is intertwined with the inflation outlook, and now we must combine it with the new government and its new policies, some of which do seem a bit inflationary, or at least may be. Therefore, it makes sense for the Federal Reserve to remain patient in this regard. I think Trump won't like the Federal Reserve's response and tone. But it feels like the right approach at the moment.”
Rusty Vanneman, Chief Investment Strategist at Orion:
“The Federal Reserve made the right decision by keeping interest rates stable. Inflation remains a problem, while the economy is holding steady. They are being cautious, which makes sense. Currently, this provides some stability for investors as we closely monitor any changes ahead. As always, we focus on long-term developments.”
Michael Rosen, Chief Investment Officer at Los Angeles Investment Company
“The bond market sold off after the FOMC statement was released because the statement did not mention that inflation is moving toward the 2% target. It is surprising that investors were surprised by this obvious fact. Inflation has been sticky for the past 18 months, meaning it has not further declined to 2%. For the past two years, the market has incorrectly anticipated that the Federal Reserve would significantly ease monetary policy. But in fact, investors should continue to short bonds.”
Ellen Hazen, Chief Market Strategist at F.L. Putnam Investment Management:
“The market is completely correct. If you look at federal funds futures, they have hardly changed. So I think the market correctly realizes that the impact of this meeting is neutral. The Federal Reserve's change in wording is somewhat hawkish—they no longer talk about a softening labor market but rather a stable one. They also no longer mention inflation slowing but believe it remains high. So both of these points are somewhat hawkish.”
“It is very tricky to shift to a process that relies less on data when the Federal Reserve may have disagreements with the government. Now is not the time for a transition. While I do believe they are hinting at this, they cannot say it publicly.”
Brian Jacobsen, Economist at Annex Wealth Management
“The Federal Reserve seems to believe that the economy is caught in a bind of low unemployment and high inflation. The statement can be interpreted as mildly hawkish, suggesting that even a small shift in rates could tip the economy out of this balance.
Matthias Scheiber, Head of Multi-Asset Solutions at Allspring Global Investments
“We believe that any window for future rate cuts may not open until after May, and we expect the Federal Reserve to cut rates twice this year.”
“As the new government begins to implement its fiscal policy agenda, we expect the Federal Reserve to remain cautious in monitoring inflation. For 2025, the interest rate market currently expects the Federal Reserve to lower rates to around 4% by the end of the year. This largely depends on how U.S. fiscal policy impacts inflation.”
“We remain bullish on stocks, especially those that are cheaper, as well as stocks in international markets that benefit from central bank rate cuts and currency depreciation. We expect the stock market rally to broaden and believe that any further easing of monetary policy could support stock prices in the medium term. Despite the narrowing spreads, the outlook for high-yield bonds remains optimistic, as the likelihood of a U.S. recession appears low.”
Michele Raneri, Head of U.S. Research and Consulting at Transunion
“After a series of better-than-expected economic indicators, the Federal Reserve today abandoned the decision to cut rates again and chose instead to hold steady for now. This is the first FOMC meeting since July 2024 that did not involve a rate cut. How many rate cuts there will be in 2025 remains to be seen. While concerns about inflation have significantly eased, they still exist. Therefore, the magnitude of rate cuts next year is likely to be less than previously expected a few months ago. We will continue to monitor how previous rate cuts play out in the economic ecosystem.”
Michael Brown, Senior Research Strategist at Pepperstone
“To be honest, I’m not sure if (the Federal Reserve's omission of 'progress' on inflation in the policy statement) will change the game, although it may suggest that policymakers want to see further anti-inflation progress before cutting rates again later this year. However, the future path of interest rates is certainly downward. Given that the Federal Reserve's start this year is almost the same as where they interrupted in 2024, the timing of rate cuts will still depend on future data releases.”
Lindsay Rosner, Multi-Sector Investment Head at Goldman Sachs Asset Management
“In the new year, the Federal Reserve has entered a 'new phase' of the easing cycle, where strong economic growth and resilient employment data provide space for a more patient approach amid rising uncertainty in data and policy. While we still believe that the Federal Reserve's easing cycle is not over, the FOMC wants to see further progress in inflation data for the next rate cut, as they removed the statement that inflation is making progress.”
Joseph Sroka, Chief Investment Officer at Novapoint:
“The Federal Reserve kept rates unchanged as expected. It made clear back in December that the pace of rate cuts in 2025 would slow. With the new government coming in and its fiscal and other policies being put forth, the Federal Reserve is now in a favorable position to deal with the complex data changes arising from the first three to four months of the new administration after cutting rates by 100 basis points.”
Jamie Cox, Managing Partner at Harris Financial Group
“The Federal Reserve just told us that there will be no rate cuts in March, so all eyes are on May. The removal of language about inflation progress led some market participants to conclude that the Federal Reserve is shifting its rate preference from lower to higher—I disagree with that view. I believe the Federal Reserve removed this wording to shift the market's focus away from the inflation trajectory and instead focus on economic growth and unemployment, both of which are in very favorable positions.”
Mark Luschini, Chief Investment Strategist at Janney Montgomery Scott:
“The fact that interest rates are unchanged is not surprising. However, the removal of language about progress on inflation suggests that the Federal Reserve acknowledges that inflation remains above its target and may be stabilizing above that target.”
Guy Lebas, Chief Fixed Income Strategist at Janney Montgomery Scott:
“After cumulative rate cuts of 100 basis points, the Federal Reserve has slowed the pace of rate cuts. While the direction is still toward lowering rates, the speed has decreased. Sustained strong economic growth and some slightly elevated inflation data in the fourth quarter are to blame. Currently, a slower pace of rate cuts suggests that the January FOMC meeting may 'skip' a cut, with another potential cut in March as first-quarter inflation data approaches 2%. This is far from certain and depends on unpredictable short-term data, but from our perspective, a March rate cut seems the most likely outcome.”
Article reprinted from: Jin10 Data