The Federal Open Market Committee (FOMC) voted to keep the federal funds rate target range steady at 3.50%–3.75%. There were two dissents in favor of a 25 basis point (bp) cut, submitted by Governors Stephen Miran and Christopher Waller.

Changes to the FOMC Statement:

• The Federal Reserve (Fed) revised its description of unemployment as having shown some signs of stabilization and revised growth as expanding at a “solid” pace. It kept its assessment of inflation unchanged, describing it as "somewhat elevated". 
• On the balance of risks, the Fed removed that “downside risks to employment rose in recent months”.
• The Fed maintained its existing forward guidance that the “extent and timing” of additional rate adjustments would be data dependent.

Key Quotes from Chair’s Press Conference:

• Current and expected policy stance:
  • “What we say is, it is within the range of plausible estimates. This is the higher end of that range, but for some people, I think it is neutral. I think, and many of my colleagues think, it is hard to look at the incoming data and say that policy is significantly restrictive at this time. It may be loosely neutral or somewhat restrictive. It is in the eye of the beholder”
  • “it is not anybody's base case right now that the next move will be a rate hike, but ultimately we will do what we think is the right thing, but that is not where our people's expectations are right now.”
  • “I would say that the upside -- again, the upside risks to inflation and the downside risks to employment have diminished, but they still exist. So, there is still some tension between the mandates. Are they fully in balance? Hard to say. Hard to say. And, you know, again, we think our policy is in a good place.”
•  Labor Market and Growth Risks: 
  • “There are lots of little places that suggest the Labor Market has softened, but you are right. Part of payroll job softening is both the supply and demand for labor, growth in those two have come down. So, that makes it a difficult time to read the Labor Market. You know, so, major they both came down a lot, to the point there is no job growth. Is that full employment? In a sense it is. If demand and supply are in balance, you could say that is full employment.”
  • “Also, as you probably know, the lure is when GDP and the Labor Market get into an argument, in the end the Labor Market data is more reliable. The GDP data is very hard to collect and understand.”
• Inflation, Inflation Expectations, and the Impact from Tariffs
  • “there are many different estimates and they are all highly uncertain, but most of the overrun in goods prices is from tariffs. That is actually good news, because if it weren't from tariff, it might mean it is from demand, and that is a hard problem to solve. We do think tariffs are likely to move through, and be a one-time price increase. So, most of the overshoot -- if you were to take that out, you would get -- I mean, inflation, a core piece of the inflation is running a bit above 2%, X the effects of tariffs on goods. And the other good news is, if you look away from goods and look at services, you do see ongoing disinflation in all the categories services, so that is a healthy development. That is what is going on.”

Our View:

• The Fed held rates steady against a backdrop of mixed labor market data and elevated but nonthreatening inflation. Since the December meeting, hiring data has remained soft for the most part, while firings remain low. Privately sourced consumer and business sentiment remains mixed while financial conditions have eased. The October and November Personal Consumption Expenditures (PCE) inflation data came in soft, with some give back expected in the December report. We expect the Fed to continue to look through tariff inflation and data volatility related to the government shutdown, choosing instead to focus on wage and services disinflation..
• In the press conference, Powell retained the committee’s easing bias while allowing for flexibility and emphasizing data dependence on a meeting-by-meeting basis. Importantly, he indicated that rate hikes are not the base case for the Fed’s future policy path. He also acknowledged that a number of combinations of labor and inflation data developments could motivate another rate cut.
• We maintain our base case of sub-trend growth. Real gross domestic product in the first half of 2025 averaged 1.6%. Growth in the third quarter surprised to the upside and fourth quarter growth forecasts are strong. Business investment in sectors such as technology and artificial intelligence (AI) remains robust, and the most recent personal consumption data has remained solid. That said, consumer sentiment and hiring data point to downside risk in the coming consumption data.
• We maintain our trading range for the 10-year U.S. Treasury at 3.75%–4.25%. This yield range is supported by the Fed’s forecast to gradually move the policy rate lower from the current higher end of estimates. This is justified by evidence of continued slack in the labor market, ongoing wage moderation, and continued service disinflation. The balance of risks to growth and yields could shift to be more two-sided if the labor market retightens. On the other hand, a pick-up in job layoffs would prompt the Fed to cut below neutral and result in a lower trading range for the 10-year U.S. Treasury yield.

Forecasts, projections and other forward-looking statements are based upon current beliefs and expectations. They are for illustrative purposes only and serve as an indication of what may occur. Given the inherent uncertainties and risks associated with forecasts, projections and other forward statements, actual events, results or performance may differ materially from those reflected or contemplated.

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