Federal Reserve pauses, sees economy on firm footing

출처 Fxstreet

At its January meeting, the Federal Reserve kept the Fed Funds Target Range (FFTR) unchanged at 3.50%–3.75%, a decision that was fully in line with market expectations.

FOMC statement highlights

The Committee acknowledged that inflation remains somewhat elevated, while noting that it no longer judges downside risks to employment as rising. The unemployment rate has shown signs of stabilisation, although job gains remain low, and uncertainty around the economic outlook remains elevated.

The Fed upgraded its assessment of economic activity, saying growth has been expanding at a “solid” pace, while reiterating that it remains attentive to risks on both sides of its dual mandate. The statement also reaffirmed the longer-run goals and monetary policy strategy.

The decision passed by a 10–2 vote, with Governors Miran and Waller dissenting in favour of a 25 basis points rate cut.

Powell press conference

Chair Powell said the US economy is on firm footing and that the current stance of policy is appropriate, continuing to promote progress towards both employment and inflation objectives. He noted that housing activity remains weak, while government shutdown effects should be reversed this quarter.

Powell suggested the labour market may be stabilising, though job growth has slowed, reflecting both a decline in labour force growth and softening labour demand. Measures such as Conference Board job availability point to some cooling, and Powell acknowledged that the labour market has softened, even as the economy has again surprised with its strength.

On inflation, Powell reiterated that it remains somewhat elevated relative to the Fed’s goal, with core PCE inflation in December estimated at around 3%. He stressed that most of the inflation overshoot has come from goods prices linked to tariffs, rather than demand, and described core PCE excluding tariff effects as running just above 2%, calling this a healthy development. Disinflation in services is continuing, while tariff-related goods inflation is expected to peak around the middle of the year and then ease, with much of the overshoot seen as one-time.

On policy, Powell said the policy rate is within the range of plausible estimates of neutral, likely towards the higher end, and argued it is hard to characterise policy as significantly restrictive based on incoming data. He stressed that policy is not on a preset course, with decisions taken meeting by meeting, and that the Committee is well positioned to determine the extent and timing of further adjustments.

Powell said no one’s base case is a rate hike, adding that a weakening labour market would argue for cuts, while continued labour strength would not. He noted that risks to both sides of the mandate have diminished somewhat, though it is hard to say they are fully in balance.

Finally, Powell said short-term inflation expectations have fully retraced, which he described as “very comforting”, while longer-term expectations continue to reflect confidence in a return to 2% inflation, reiterating that the Fed will always act if the economy moves away from its goals.

Overall, Powell’s tone was broadly neutral, leaning mildly dovish, as he downplayed restrictiveness, highlighted improving inflation dynamics, and kept the door open to future cuts without committing to them.


Interest rates FAQs

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

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