Stephen Miller
As had been almost universally expected, the Federal Reserve’s Federal Open Market Committee (FOMC) overnight announced that it had kept the policy rate unchanged in the 4.25-4.5 per cent range.
The decision to hold the policy rate in its current range was not unanimous with two Federal Reserve (Fed) Governors favouring a lowering of the policy rate, the first time two members of the FOMC have dissented since 1993.
In announcing the decision, the Fed Statement noted that the “growth of economic activity moderated in the first half of the year,” but that “labour market conditions remain solid” and inflation “remains somewhat elevated”.
Fed Chair Powell described the current stance as “moderately restrictive” and refused to be drawn on the likelihood of a cut at the next meeting in September.
He seemed to indicate that at some point the FOMC would be in a position to contemplate a move toward a more neutral stance, leaving open the possibility of a cut in the policy rate at some stage this year but, as stated, would not explicitly put September in the frame.
The “dot plot’ issued at the last meeting in June indicated two policy rate reductions in 2025.
In essence the decision is very much the status quo: there are concerns that reflecting the Trump tariff agenda there is latent inflation in the system, and the Fed remains concerned that inflation expectations remain anchored in the wake of price pressures emanating from tariffs and therefore don’t see room for cutting the policy rate just yet.
Indeed, in his press conference, the Fed Chair implied that by not raising the policy rate now, the Fed is effectively looking through the price effects of tariffs. He noted several times that goods prices have increased in tariff-sensitive categories.
There seemed, however, some nod from the FOMC that they are cognisant of risks that the labour market may soften further, even if in his press conference, the Fed Chair maintained that according to a broad sweep of indicators the labour market was in reasonably good shape.
All that added up to the Fed Chair retaining maximum optionality in terms of when there might be an adjustment to policy meaning that the Fed course remains heavily data dependent.
That is a September policy rate reduction is not implausible, but it is a some way from where the Fed is at this point in time.
The reaction in markets seemed to indicate that they saw the Fed as somewhat more hawkish than anticipated: bond yields rose as markets downgraded the probability of a September rate cut while equities retreated, and the USD rose.
Markets clearly had been looking for the Fed Chair to indicate that the Fed was thinking that a September rate cut was squarely on the agenda.
They were disappointed.
By Stephen Mller, investment strategist