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.