US: Fed on pause for a while?

The US Federal Reserve decided to stay on hold in January, having lowered 75bp since September. Christopher Waller and Stephen Miran both dissented and voted to cut rates.

With rates close to (the upper end of) assessments of neutral and a somewhat more upbeat assessment of the economy, there was a sense that that this may not be a brief pause from the Fed. They feel they are in a good position to wait on the data. Again, monetary is not on a present course and “we will make our decision on a meeting-by-meeting basis”.

Not a hawkish tone as such, but there is little pressure from the data to cut

Inflation remains “somewhat elevated” and economic activity has been expanding at a “solid pace”. Even if job gains have “remained low”, Jerome Powell flagged some signs of stabilisation. The statement deleted language saying that “downside risks to employment rose in recent months” with Chair Powell arguing that they felt it was no longer an accurate picture of the data. He said that the outlook has improved based on the incoming data (referencing the more upbeat Beige Book for example).

When specifically asked whether the timeline for cuts had been pushed back compared to December, Powell started by referencing the incoming data suggesting a clear improvement in the outlook for growth. He also said that it was hard to look at the data and suggest that policy is significantly restrictive. He did, however, acknowledge that not all the data has been positive and said that it was a particularly difficult time to read the labour market.

My central case has been for two more rate cuts over the next 18 months or so (one this year and one next year).

Further policy easing still sounds on the cards – providing inflation falls as expected

They sound on hold until something changes, and they do expect inflation to fall this year. They expect the impact on goods price inflation of tariffs to peak (in the middle quarters of the year) then to come down, and they feel they are already seeing good news in services prices. Powell said that if they see that then it would be something telling them they can loosen policy (as would a deterioration in the labour market). My central case has been for two more rate cuts over the next 18 months or so (one this year and one next year).

Could they raise rates?

He was asked about a rate rise but said that was nobody’s base case. He said ultimately, they will do what they think is the right thing, but that a rate hike was not where people’s expectations are right now.

There was a lot he wouldn’t be drawn on

There was a lot he wouldn’t be drawn on including the subpoenas, whether the Fed had responded to them, and whether he would stay on the board when his term ends. Neither would he comment on the dollar, saying that was the treasury’s domain. He did, however, say that he and his colleagues were firmly committed to independence and one of his pieces of advice to his successor was to “stay out of elected politics”.

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