The Federal Reserve (Fed) left its target range for short-term interest rates unchanged at today’s meeting. Markets have been discounting a January pause in rate cuts since the Fed’s last meeting where Chair Powell called for greater caution. 

Current Conditions – Employment data has strengthened over the last few months and the Fed’s language expressed less concern toward downside risks to the economy. Monthly growth in non-farm payrolls accelerated in the second half of 2024 and the Unemployment Rate appears to have stabilized with a reading of 4.1% in 3 of the last 4 months. The Fed continues to describe inflation as “somewhat elevated,” with its preferred measure at 2.8% versus a long-term target of 2.0%. Today’s statement eliminated a previous reference to the Fed’s progress toward the inflation target, which appears to have caught markets off-guard.  

Forward Guidance – The Fed judges the risks of high inflation and weak economic growth as being roughly in balance. Policy is still viewed as restrictive and the Fed expects to eventually lower rates, but Powell emphasized that the Fed is not in a hurry. The economy is in a “good place” according to Powell, and uncertainty over the new administration’s policies make forecasting more difficult than usual. 

Policy/Market Reaction – Markets initially viewed the release as a “hawkish pause” in the Fed’s rate cutting cycle. Bond yields and the Dollar were higher while major equity indices faded.  All three sectors (rates, currency, and equities) unwound most of the post-release reaction while the Chair gave his press conference. The Fed made no changes to its glide path in reducing its holdings of Treasuries and mortgage-backed securities. Powell noted that the Fed has begun a periodic review of its broad policy framework. Importantly, the 2% inflation target will not be changed and is not up for review.   
 

Gary Pzegeo, CFA, is co-chief investment officer of CIBC Private Wealth. His responsibilities include chairing the Asset Allocation Committee and overseeing the investment administration, portfolio oversight, and fixed income and equity trading functions.