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FOMC meeting update

Investment Insights • Macro Flash Note

3 min read

FOMC meeting update

The Federal Open Market Committee (FOMC) meeting on 29 January predictably saw rates stay on hold while in the post-meeting press conference Chairman Powell signalled a data dependent approach to the future path of policy.

Daniel Murray
Daniel Murray

There is a common narrative amongst investors that higher rates are bad for equities. However, it is important also to understand why rates are expected to stay elevated. If tighter policy is the result of an improvement in the economic outlook - as is the case at the moment - history suggests that is a supportive environment for risky assets, including equities.

Rate expectations are inextricably linked to the joint outlook for inflation and the labour market. Given that the former is stubbornly above target and the latter remains tight it is not surprising that the Fed chose to stay on hold. At the same time, the Fed can legitimately claim it has the luxury of being able to wait and see what impact last year’s rate cuts have on the economy before succumbing to pressure to ease policy further.

Chart 1. Simplified decision matrix

Fed_Jan_25.png

Source: EFG.

Chair Powell described the policy stance as “meaningfully restrictive”. When the fed funds rate was at 5.25% - 5.50% it was clear that this was the case. However, with the fed funds rate now 100bps lower, it is evidently closer to neutral and the judgement call is more ambiguous. This also helps to explain the outcome of the latest FOMC meeting. It is notable in this context that the fed funds futures contract for December 2025 has barely moved relative to the day before the FOMC meeting, suggesting that Powell’s views were already well-priced. 

Our expectation is that US inflation follows a gently declining trend over the coming 12 months that gives the Fed space to cut at least twice more this year. We expect this to be reflected in an ongoing steepening of the yield curve, pivoting around the 2-3 year part of the curve. A possible rate cut in March is not the core view but cannot be ruled out particularly given that there are two more consumer price index (CPI) releases, two more personal consumption expenditures (PCE) releases and two more jobs reports before then.

The Fed will be interested in the impact of the Trump administration’s policies on the macro outlook. However, at the moment there is insufficient detail for the Fed to be able to react. This could be a factor in future policy decisions but is unlikely to be a significant influence on monetary policy for the time being. While tariffs would likely push inflation higher this would be offset to some extent by lower energy prices that are likely ensue under Trump's expected policies.

Powell is likely to push back against any suggestion that the Fed will be influenced by Trump’s bellicose rhetoric on why rates should be lower. However, there may well be a subconscious influence related to Trump’s pronouncements whereby an undecided individual is swayed by such outbursts.

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