In Brief
- The Fed maintained the target range for the federal funds rate at 3.50-3.75% and maintained its outlook for one rate cut this year.
- Adjustments to the statement language were uncontroversial; it noted the unemployment rate has been little changed in recent months after stabilizing earlier this year.
- Updated projections to the committee’s SEP tilt hawkish.
- The Fed pushed up its longer-run estimate of the federal funds rate to 3.1% from 3.0%.
As widely expected, the Federal Reserve (Fed) maintained the target range for the federal funds rate at 3.50-3.75% and maintained its outlook for one rate cut this year. Again, Fed Governor Stephen Miran dissented in favor of a 0.25% cut. Adjustments to the statement language were uncontroversial; it noted the unemployment rate has been little changed in recent months after stabilizing earlier this year. It also explicitly mentioned the impact of developments in the Middle East on the U.S. economy remains uncertain, therefore complicating projecting future adjustments to policy rates.
Updated projections to the committee’s Summary of Economic Projections (SEP) tilt hawkish:
- Growth was nudged higher by 0.1% to 2.4% this year, and by 0.3% to 2.3% in 2027, reflecting a more modest near-term boost to growth driven by One Big Beautiful Bill Act (OBBBA) stimulus, yet more sustainable growth via productivity gains in 2027.
- Unemployment rate forecasts were unchanged.
- Both headline and core Personal Consumption Expenditures (PCE) forecasts were marked higher to 2.7% by 4Q26, before declining to 2.2% by the end of next year. Both tariff-related inflation and, more recently, an energy price shock, are expected to keep inflation elevated this year, but normalize through 2027.
- The median interest rate outlook maintained just one cut for this year and next, with the range of views narrowing since its last meeting. At its December meeting, eight members viewed policy rates should be lower than the median year-end outlook of 3.25-3.5%, today just five members maintained that view.
Interestingly, the Fed pushed up its longer-run estimate of the federal funds rate to 3.1% from 3.0%. This means that, all else equal, current policy is less restrictive. If the core of the committee is gently advocating for a higher finish line for the fed funds rate, new incoming Chair Kevin Warsh has his work cut out for him.
During the press conference, Fed Chairman Jerome Powell highlighted the near-term risks to headline inflation driven by higher oil prices, but broadly, the committee should look past short-term shocks so long as they do not de-anchor longer-run inflation expectations. Longer-run inflation expectations have remained contained, however, they have moved modestly higher and are worth monitoring. With regards to labor, Powell also emphasized looking at both demand and supply dynamics, with the committee’s preferred measure being the unemployment rate, which has remained stable since September.
Succinctly, Powell stated he would stay on as Chairman of the Fed until the investigation from the Department of Justice has included. In addition, if Kevin Warsh is not confirmed by the time his term expires in May, he will remain as Chair until the incoming Chair is confirmed.
Overall, we still expect the Fed to reduce rates at least once this year. Should the conflict in the Middle East subside in the coming weeks, oil prices will drop rapidly leading to a strong disinflationary impulse in the back half of the year, allowing the Fed to continue easing. However, the outlook remains highly uncertain; therefore, investors would be wise to stay diversified across domestic and international stocks, bonds, alternative assets and commodities.