Fed Preview: Central Bank Expected to Remain on Hold at 4.25-4.50%

Fed Preview: Central Bank Expected to Remain on Hold at 4.25-4.50%

I see no justification for the US Federal Reserve (Fed) to upset the financial markets at this week's policy meeting (Wednesday, 7 pm GMT). Still, I feel it will maintain the hawkish tones we saw in December, which could underpin a bid in the US dollar (USD). For those following the USD, I recently released a technical view on the possibility of USD upside here.

The central bank is widely expected to hold the target rate at 4.25-4.50%, which will be the first time the Fed has not reduced the funds target rate since July’s meeting. Markets (and economists) are also fully priced in for a no-change decision. Investors also expect the Fed to deliver just two 25-basis-point (bp) rate cuts this year in June and December, similar to the Fed’s latest projections and a recent call from Goldman Sachs. However, the desk at Nomura currently forecasts just one rate cut this year.

The Fed has no reason to rush at this point; the US economy is chugging along nicely, and pausing, in my opinion, allows Fed officials time to assess US President Donald Trump’s policies and their bearing. Still, investors will monitor for language changes in the accompanying rate statement and press conference. The Fed is anticipated to reaffirm its data-dependent stance and will likely reiterate a cautious pace of easing this year as it assesses incoming data.

Undoubtedly, reporters will fire across questions regarding the implications of Trump’s policies. I would be surprised if we heard much from Fed Chair Jerome Powell on the subject, choosing not to delve too deeply into specifics at this point. On Thursday, Trump virtually addressed the World Economic Forum in Davos and asked Saudi Arabia and OPEC ‘to bring down the cost of oil’; Trump added: ‘With oil prices going down, I will demand that interest rates are dropped immediately’. Nevertheless, although it did not take long for Trump to pick a fight with the Fed, and despite claiming he knows more about interest rates than the Fed, the central bank is an independent actor, which Powell has emphasised on several occasions.

As we already know, Trump did not impose tariffs on day one, contrary to what many analysts (including me) thought, and we have seen markets react somewhat muted (I was expecting more sizeable moves). However, markets know tariffs are inbound, so I feel the lack of tariffs at this juncture is more of a ‘postponement’ than a complete withdrawal. This, therefore, remains a risk traders need to acknowledge.

What Happened at December’s Meeting?

You will likely recall that the Fed reduced its policy rate for a third consecutive meeting in December, concluding 2024 with 100bps of cumulative cuts. However, according to the meeting minutes, despite signalling a more hawkish pace of easing, the decision to cut or pause was a close call, and members echoed the need for caution.

Adding to the hawkish tone, the Summary of Economic Projections highlighted a downward revision in unemployment and upward revisions in inflation and growth. The press conference centred on Powell’s message regarding a cautious approach, and he made clear that the central bank seeks more progress on inflation to justify further policy cuts.

Resilient US Economy

It is fair to say that Trump has inherited a resilient economy.

The Atlanta Fed’s GDPNow indicates the US economy expanded at a 3.0% pace in Q4 24 (of note, traders will receive the advance GDP [Gross Domestic Product] estimate on Thursday at 1:30 pm GMT, with the current median estimate suggesting the economy grew by 2.8%).

Investors also likely breathed a sigh of relief following the December 2024 CPI inflation report (Consumer Price Index). Although CPI inflation revealed headline price pressures increased to 2.9% on a year-on-year (YY) basis (from November’s reading of 2.7%), this was expected. Underlying CPI inflation (core) reported softer-than-expected numbers, easing to 3.2% YY from 3.3% in November.

Regarding the job market, unemployment unexpectedly ticked lower to 4.1% in December 2024, down from 4.2% in November, highlighting the economy’s strength. Additionally, more than 250,000 jobs were added to the US economy from November’s downwardly revised 212,000 print (of relevance, this was the largest increase in jobs since early 2024). Notably, wage growth also does not appear to be re-accelerating – YY was 3.9%, where it has been for three consecutive months.

Written by FP Markets Market Analyst Aaron Hill

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