Following the Fed’s announcement, find our latest market views from the Global Fixed Income Currency & Commodities (GFICC) U.S. rates team.
The Federal Open Market Committee (FOMC) voted to keep the federal funds rate target range unchanged at 4.25% – 4.50%. There were no dissents.
Changes to the FOMC Statement:
- The economic assessment had some noticeable changes. The description of labor market conditions was upgraded somewhat to reflect recent stabilization in hiring and the unemployment rate while the inflation assessment was changed to indicate that additional disinflationary progress has not been made. The labor market remains healthy, but inflation remains somewhat elevated.
- The statement reaffirmed that the risks to their employment and inflation goals are “roughly in balance” and reiterated the Federal Reserve’s (Fed) easing bias.
Key Quotes from Chair’s Press Conference:
- Current and expected policy stance:
- “We know that reducing policy restraint too fast or too much could hinder progress on inflation. At the same time, reducing policy constraints too slowly or too little could unduly weaken economic activity and employment. In considering the extent and timing of additional adjustments to the target range for the Federal funds rate, the Committee will assess incoming data, the evolving outlook and balancing risks. We are not on any preset course.”
- Explanation of the Change to the Statement:
- “We just chose to shorten that sentence. Again, I mean, if you look at the sort of inner meaning data was good, and there was another inflation reading just before December meeting, so we got two good readings in a row consistent with 2% inflation. Again, we will not over-interpret two good or two bad readings, but you can take away from all this we remain committed to achieving our 2% inflation goal sustainably.”
- Progress on Inflation:
- “We want to see further progress on inflation. The story is there. We are just going to have to see the data. At the end of the day, it comes down to 12-month inflation, because it takes out seasonality issues that may -- takes out the seasonality issues that may exist and we need to see that. We think the pathway to that could happen. A key example is that you now do see owners’ equivalent rent and housing services, the way it is calculated for PCE coming down pretty steadily now, and non-market services don't tend to send much signal. You can look that and say, okay, we seem to be set up for further progress, but being seen to set up for it is one thing but having it is another, so we want to see further progress on inflation.”
- Conditions in the Labor Market:
- “You put your finger, though, on it is a low-hiring environment. So, if you have a job it is all good. But if you have to find a job, the job-finding rates, the hiring rates, have come down… the Labor Market is at a sustainable level, it is not overheated anymore. We don't think we need it to cool off anymore. We do watch it extremely carefully. It is one of our two goal variables. But I say we watch those things quite carefully. But, nonetheless, overall, look at the aggregate data in the Labor Market, it does seem to -- the Labor Market does seem to be pretty stable and broadly in balance, when you have an unemployment rate that has been pretty stable now for a full half a year.”
- Fiscal Policy and Tariffs
- “So, in the current situation, there is probably some elevated uncertainty because of, you know, significant policy shifts in those four areas that I mentioned. Tariffs, immigration, fiscal policy and regulatory policy. So, there is probably some additional, but that should be passing. We should go through that, and then we will be back to the regular amount of uncertainty.”
- “We don't know what is going to be tariffed. We don't know for how long, how much, what countries, and we don't know about retaliation, or how it will transmit through the economy to consumers. That really does remain to be seen, you know? There are lots of places where that price increase from the tariff can show up between the manufacturer and the consumer. There are so many variables, so we have to wait and see. The best we can do is what we have done, which is study up on this and look at look at historical experience, read the literature, think about the matters that might matter, and we will have to see how it goes.”
- Balance Sheet
- “So, let's talk about runoff. The most recent data do suggest that reserves are still abundant. Reserves remain roughly as high as they were when runoff began and the Federal funds rate has remained very steady in the target range. We track a bunch of metrics and they do tend to point to reserves being abundant. We tend to reduce the size of the Balance Sheet to a level efficiently and effectively in the ample reserves regime. We are monitoring a range of indicators to assess conditions that could be somewhat above ample. I don't have anything to say to you about particular dates. That is the process, and what we see the -- the rate does appear to be abundant. As always, we stand ready to take appropriate action to support the smooth transition of Monetary Policy, including to adjust the details of our approach for reducing the size of the Balance Sheet in light of economic and financial developments.”
Our View:
- The Fed has cut 100bps since September. While the Fed still judges the current policy stance as restrictive and has retained an easing bias, policy is less restrictive than before and there is a high level of uncertainty around the fiscal policy trajectory as well as estimates of the neutral rate.
- We expect the Fed will maintain an easing bias but only deliver one additional rate cut in the first half of the year. In the absence of labor market weakness, the Fed is most likely to pause for an extended period while we learn more about the new administration’s policies and continue to monitor the flow of economic data.
- We maintain a wider expected trading range for the 10-year US Treasury (UST) yield of 3.75% - 4.75%. Continued strong growth and prospects of inflationary fiscal policy are upside risks to yields. A central bank that retains an easing bias along with a better-balanced labor market and continued moderation in wages should limit the magnitude in which yields can rise.