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Written by: Brandon Hall
Washington has been a hub of excitement for investors in recent weeks. However, the January Federal Open Market Committee (FOMC) meeting provided a welcome change of pace with few surprises. As anticipated, the FOMC decided to maintain the federal funds rate in a range of 4.25% to 4.50% during its first meeting of 2025, ending a three-meeting streak of rate cuts. With solid economic activity, a steady labor market and inflation moving higher in recent months, there were few reasons to ease policy further. Moreover, with policy fog continuing to cloud the outlook, the Committee views a patient approach as the most prudent.
Changes to the statement language tilted modestly hawkish, although Chair Powell described the changes as tweaks intended to “clean up” the language rather than more meaningful signals:
- Stability in the unemployment rate prompted the Committee to take a more positive tone toward the labor market. The statement “Labor market conditions have generally eased, and the unemployment rate has moved up but remains low” was changed to “The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid.”
- With inflation running hotter in recent months, the phrase “Inflation has made progress toward the Committee’s 2 percent objective…” was removed from the statement, leaving just “Inflation remains somewhat elevated.”
At the press conference, Chair Powell parried politically focused questions, instead focusing on the uncertainty regarding economic forecasting, particularly in periods of shifting policy.
With the Federal Funds rate now 100bps below its cycle peak, monetary policy, while still restrictive, is closer to neutral than it was just months ago, and there are few reasons to rush further cuts. That said, with policy uncertainty and tensions in Washington elevated, a move in the other direction is also unlikely. As a result, absent any sharp deterioration in the data, the Federal Reserve will remain on hold until greater policy clarity is received. Although policy specifics remain uncertain, their impacts are already being felt. Indeed, goods imports spiked in December, likely due to businesses making pre-emptive purchases ahead of anticipated tariffs, which presents downside risks to 4Q GDP.
10-year yields rose and equities stumbled after the initial press release, though both recovered during Chair Powell’s remarks, which leaned slightly dovish. Market expectations for policy easing turned modestly hawkish but remained largely unchanged, with another rate cut not expected until the summer. That said, the path forward remains largely uncertain. With elevated valuations across financial markets, any surprises, even minor ones, could cause volatility to spike. Against this backdrop, diversification is of the utmost importance.
Federal funds rate expectations
FOMC and market expectations for the federal funds rate
Source: Bloomberg, FactSet, Federal Reserve, J.P. Morgan Asset Management.
Market expectations are based off of USD Overnight Index Swaps. *Long-run projections are the rates of growth, unemployment and inflation to which a policymaker expects the economy to converge over the next five to six years in absence of further shocks and under appropriate monetary policy. Forecasts are not a reliable indicator of future performance. 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 or other forward-looking statements, actual events, results or performance may differ materially from those reflected or contemplated.
Guide to the Markets – U.S. Data are as of January 29, 2025.
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