The Federal Reserve (Fed) left its policy rate in a target range of 5.25% to 5.50%, as anticipated by markets.  At today’s press conference, and in the official release from the Fed, Powell noted that the risk of high inflation is no longer the dominant concern of policymakers.  The FOMC now sees the risk of inflation in better balance with the Committee’s risk of achieving maximum employment.  The Fed will likely move to lower policy rates at some point during the year, but members of the FOMC would like to see more good news on the inflation front.  Specifically, Powell pointed to the services sector as an area where the Fed would like to see a greater contribution to the improvement in broader inflation measures.

Current Conditions – The Fed’s statement described the economy as expanding at a solid pace despite a restrictive monetary policy.  The Fed has been pleased with the improvement in inflation over the previous six months, but the trailing year’s data remains elevated. 

Forward Guidance – Powell repeated the Committee’s view that policy rates are currently at a peak for the cycle.  The Chairman added that the Fed would likely begin dialing back policy rates at some point this year. Powell noted that March was not the most likely time for a rate cut.  The Fed will see one additional data point on its preferred inflation measure prior to the March 20 meeting.  Prior to the meeting, markets were split on whether or not March would be the date of the first rate cut.

Policy/Market Reaction – Today’s move was unanimously approved by the Committee.  Quantitative tightening (QT) will continue at its previous pace.  The Fed had some further discussion over the balance sheet at this meeting and will have an in-depth discussion over the pace of QT in March.  Markets were positive prior to the release thanks to a better than expected report on employment costs.  Following the press release, interest rate futures moved to lower the odds of a March cut.

Gary Pzegeo, CFA  joined the firm in 2007 as head of fixed income, focusing on portfolio management, trading, policy formulation and client service.