Market Wire: Fed Holds Rates, But Acknowledges Slowing Progress on Inflation

As had been widely anticipated, the Federal Reserve left benchmark borrowing rates unchanged this afternoon, but officials acknowledged seeing a slowing in disinflationary pressures, suggesting that the next cut could be many months away.

The Federal Open Market Committee voted unanimously to maintain the target range for the federal funds rate between 4.25 to 4.50 percent, pausing for breath after cutting by a full percentage point in the last three meetings.

In the statement setting out the decision, officials made relatively modest changes. A sentence that previously said “labour market conditions have generally eased and the unemployment rate has moved up”, was replaced with the more neutrally-phrased “labour market conditions remain solid”. But where policymakers had previously acknowledged inflation making “progress” toward the 2-percent objective, new language was inserted that reads “Inflation remains somewhat elevated”.

No new quarterly economic or interest rate projections were provided.

Since Fed officials began cutting rates in September, the labour market has remained in rude health, and measures of financial conditions have remained accommodative, yet inflation has subsided more slowly than anticipated, short-run inflation expectations have climbed, and long-term yields have risen.

Today's statement would suggest that policymakers are taking a hawkish view, on balance, of these fundamentals, but uncertainties surrounding the new administration’s direction—on fiscal, trade, and government spending matters—are high, and officials have said they don’t intend to react until policies reach the implementation stage and begin to impact incoming economic data.

Treasury yields are up across the curve, and the dollar is adding to this morning’s gains as traders shift bets on the next rate cut out to June or beyond.

Price action could intensify—and possibly reverse—in the coming minutes when Jerome Powell speaks with reporters, but the noise-to-signal ratio is likely to be quite high. Powell could provide some clarity on the central bank’s view of underlying inflation dynamics, but he simply isn’t in a position to deliver clear insight into how the Fed’s reaction function will evolve in the months ahead as the Trump administration tinkers with the American economy, and he will undoubtedly put his—quite considerable—communications skills to work in ensuring that policymakers don’t run out of room for manoeuvre.

**To watch the post-decision press conference, click here