CONTRIBUTORS
Nicholas J. Mastroianni, CFA
Western Asset
For the second consecutive January, the Federal Open Market Committee (FOMC) voted to keep the target range for the fed funds rate unchanged, following a series of consecutive rate cuts to end the prior year. The decision itself was widely anticipated and had little impact on financial markets.
In the prepared statement, the committee upgraded its assessment of economic growth from “moderate” to “solid,” reflecting accelerating gross domestic product (GDP) growth in the second half of 2025. On the labor market, the committee acknowledged “some signs of stabilization” after December showed a slight decline in the unemployment rate. And consistent with recent FOMC meetings, the decision itself was not unanimous as Federal Reserve (Fed) Board Governors Stephen Miran and Christopher Waller dissented in favor of a 25-basis-point (bp) reduction.
Without a refreshed Summary of Economic Projections (SEP), it was the press conference that offered Fed Chair Powell an opportunity to address whether today’s action was simply a “skip” or a more extended pause in the easing cycle. While his remarks did not rule out the resumption of rate cuts at the March meeting, they suggest to us that an extended pause from here is the more likely path forward. When asked about the timing of additional easing, Powell repeated the familiar refrain that the committee remains “well positioned” to address risks to both sides of its dual mandate. Pressed further, he noted that risks to both sides of the dual mandate have “diminished a bit,” but stopped short of offering an opinion on which side might currently be further from its stated objective.
When asked about the current stance of policy and how it might compare to estimates of neutral, Powell offered the idea that despite lowering rates by 175 bps from their recent peak, the December SEP showed that 16 of the 19 committee members still view the current policy stance as restrictive relative to their estimates of the longer-run neutral rate. He went on to say that it’s “not anybody’s base case right now that the next move will be a rate hike.”
With economic activity accelerating and inflation still somewhat above the Fed’s 2% target, we’re in agreement with the committee that the US economy is healthy enough to endure a period of rates on hold, at least through the first half of 2026. Further tariff-related goods inflation is likely to come and go, and growth should remain healthy, supported by fiscal tailwinds, continued AI investment and positive wealth effects that help to sustain consumer spending. Although these dynamics might temper the case for further rate cuts in the near term, we believe that broadly softening wages, anemic hiring rates and continued moderation of services inflation will ultimately create room for the easing cycle to resume later this year.
Much has been made of the potential transition from Chair Powell to a Trump-appointed Fed Chair following the May FOMC meeting. Despite concerns about a possible erosion of Fed independence, we continue to believe that the broader committee will retain meaningful influence over the setting of policy rates, and that future policy decisions will ultimately be driven by the evolution of the incoming economic data rather than overt political pressure. That said, we would reassess this view in the unlikely event that the Supreme Court were to rule in favor of removing Lisa Cook from the Board of Governors on charges related to alleged mortgage fraud.
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