
Market Minute: FOMC Maintains Restrictive Interest Rate Policy
Federal Reserve chair Jay Powell gestured during the most recent FOMC meeting this week that the committee had reached a pause mode. It’s no surprise that the Fed left short-term rates unchanged after lowering them by a full percentage point during the three prior meetings. The official statement accompanying the decision omitted any reference to progress on inflation, which some analysts initially viewed as a hawkish tilt. Despite a lack of improvement in the rate of inflation which has stalled over the past few months, the disinflationary trend is still intact.
The pause in rates also reflects the continued strength in core economic aggregates, which is why markets did not throw a temper tantrum as rates remain firm. The jobs market is healthy, and the economy is growing above trend of around 2 %. Recent fourth quarter GDP data suggests the economy grew at an annualized rate of 2.3%, slightly below estimates of 2.6%. Nonetheless, it appears that the market is trending based upon strong economic fundamentals and is not bothered by a lack of downward adjustment to the Fed’s main policy rate.
Rates will remain where they currently are until good inflation news comes in, or until the employment numbers show signs of weakness. With core inflation above the long run target of 2%, the Fed continues to maintain a restrictive policy stance as the overnight bank lending rate between 4.25% and 4.5% stands at approximately 150 basis points above the most recent core inflation data. Therefore, monetary conditions remain restrictive and the risk of accelerating inflation remains low, absent a shock from abrupt policy changes surrounding fiscal balance or tariffs.
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