A streamlined FOMC statement that preserved maximal flexibility belied a substantive tonal shift - the Fed is on an indefinite hold. Barring unforeseen labor market weakness, another rate adjustment before June appears unlikely. Fed officials will wait to assess policy implementation as it concerns tariffs and immigration as well as fiscal and regulatory developments. These assessments will precede deliberations about whether sufficient progress on inflation (i.e., a series of lower readings) warrants another 25bp move.
The inflationary nature of adversarial trade policy will be weighed against the prospect of employment pullbacks and slower growth in the wake of draconian measures in determining whether present rate levels are as restrictive as they had seemed. The Fed will be keen to temper any resurgent inflation expectations and Chair Powell emphasized that there is little urgency to enact further monetary policy adjustments in the near-term. For the time being, the easing recalibration has run its course.
4 FEB 2025
Edward von der Schmidt
| Sources
Key Takeaways
The Fed telegraphed a holding pattern on January 29 by reducing its signals in order to preserve flexibility amid heightened policy uncertainty and an unresolved outlook.
Chair Powell outlined distinct scenarios that will determine the thrust of policy. On one hand, the Fed will maintain rates at current levels if the economy remains strong and inflation does not trend downward. On the other, unanticipated labor market weakness or disinflation could prompt a rate cut this Summer.
Inflation may be "somewhat elevated" - but that is still above-target. The Fed would prefer to observe a sustained downward trajectory (i.e., "real progress") before considering further loosening of policy. This will require a series of readings over the course of months, precluding Fed action in March (18-19) or May (6-7). Note that Chair Powell all but explicitly ruled out a March cut when asked directly whether it was still on the table.
More importantly, administrative policy uncertainty is now at the forefront. The Chair outlined four key areas - tariffs, immigration, fiscal, and regulatory - that must be resolved in order to assess the trajectory of the economy and to determine an appropriate course of action. While peer central banks may be responding preemptively to tariff threats, the Fed intends to evaluate the administration's policies as they are implemented before taking action.
The Fed is in "no hurry" to adjust its stance further - this should temper any expectations of Spring easing. The FOMC sees current policy as "well-calibrated" and "well-positioned" even though overnight rates are still "meaningfully restrictive".
Note that the composition of the FOMC has rotated to begin the year. Collins (Boston), Goolsbee (Chicago), Musalem (St. Louis), and Schmid (Kansas City) have replaced Barkin (Richmond), Bostic (Atlanta), Daly (San Francisco), and Hammack (Cleveland) on the Committee. Permanent voters have not changed - Chair Powell, Williams (New York, Vice Chair of FOMC), Vice Chair Barr, Governor Bowman, Governor Cook, Vice Chair Jefferson, Governor Kugler, and Governor Waller.
Statement Comparison
Topic | December | January |
Economic Activity | "has continued to expand at a solid pace" | "" |
Labor Market | "conditions have generally eased" | "conditions remain solid" |
Inflation | "has made progress toward the Committee's 2 percent objective but remains somewhat elevated" | "remains somewhat elevated" |
Risks | "roughly in balance" | "" |
Economic Outlook | "uncertain" | "" |
Additions:
The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated.
In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent.
Subtractions:
Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee's 2 percent objective but remains somewhat elevated.
In support of its goals, the Committee decided to lower the target range for the federal funds rate by 1/4 percentage point to 4-1/4 to 4-1/2 percent.
Voting against the action was Beth M. Hammack, who preferred to maintain the target range for the federal funds rate at 4-1/2 to 4-3/4 percent.
Prepared Remarks
"The economy is strong overall and has made significant progress toward our goals over the past two years. Labor market conditions have cooled from their formerly overheated state and remain solid. Inflation has moved much closer to our 2 percent longer-run goal, though it remains somewhat elevated."
"For 2024 as a whole, GDP looks to have risen above 2 percent, bolstered by resilient consumer spending. Investment in equipment and intangibles appears to have slowed in the fourth quarter but was strong for the year overall. Following weakness in the middle of last year, activity in the housing sector seems to have stabilized."
"Overall, a wide set of indicators suggests that conditions in the labor market are broadly in balance."
"Inflation has eased significantly over the past two years but remains somewhat elevated relative to our 2 percent longer-run goal"
"Over the course of our three previous meetings, we lowered our policy rate by a full percentage point from its peak. That recalibration of our policy stance was appropriate in light of the progress on inflation and the rebalancing in the labor market. With our policy stance significantly less restrictive than it had been, and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance."
"In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will assess incoming data, the evolving outlook, and the balance of risks. We are not on any preset course."
"If the economy remains strong and inflation does not continue to move sustainably toward 2 percent, we can maintain policy restraint for longer. If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we can ease policy accordingly."
"We remain committed to supporting maximum employment, bringing inflation sustainably to our 2 percent goal, and keeping longer-run inflation expectations well anchored."
Press Conference
Whether the assessment of policy as 'meaningfully restrictive' has changed:
"I don't think that my assessment really has changed... if we look back over the past year or so, we can see that policy is restrictive... Now, policy is meaningfully less restrictive than it was before we began to cut... for that reason, we're going to be focusing on seeing real progress on inflation or alternatively, some weakness in the labor market before we... consider making adjustments."
Whether policy rates would still be meaningfully restrictive if they were cut another 25bp:
"So I think our policy stance is very well calibrated ... to balance the achievement of our two goals... I think policy is well-positioned."
Language changes in the FOMC statement regarding progress toward inflation goals:
"We just chose to shorten that sentence... we've got two good readings in a row that are consistent with 2 percent inflation. Again, we're not going to over-interpret two good or two bad readings, but this was not meant to send a signal other than this... we remain committed to achieving our 2 percent inflation goals sustainably."
Characterizing upside risks to inflation:
"Well, I'd say you see expectations moving up a little bit, at the short-end, but not at the longer run, which is where it really matters. And those could be related to, could be related to what you mentioned, some of the new policies. I think where the Committee is very much in the mode of waiting to see what policies are enacted. And we don't know what will happen with tariffs, with immigration, with fiscal policy, and with regulatory policy... I think we need to let those policies be articulated before we can even begin to make a plausible assessment of what their implications for the economy will be... We'll patiently watch and understand and kind of not be in a hurry to get to a place of understanding what our policy response should be until we see how it plays out."
Elevated forecast uncertainty:
"There's probably some elevated uncertainty because of significant policy shifts in those four areas that I mentioned; tariffs, immigration, fiscal policy, and regulatory policy. So there's probably some additional uncertainty, but that should be passing."
Whether the Fed is looking for data to motivate a cut or hold:
"We are looking at the data to guide us in what we should do... right now we feel like we're in a very good place, policy is well-positioned, the economy is in quite a good place actually as well, and what we do expect is to see further progress on inflation... as we see that, or if we were to see weakening in the labor market... we could then be in a position of making further adjustments. But, right now we don't see that, and we see things as in a really good place for policy and for the economy and so we feel like we don't need to be in a hurry to make any adjustments."
Modeling policy implications for the workforce (e.g. immigration):
"So one of the things our staff does is they look at a range of possible outcomes... in each Tealbook - you can look at the five year-old Tealbooks and see - there are alternative simulations... and what those do is they spark the policy makers to sort of think and understand about the, the uncertainties that surround this... But it's, it's different, it's one thing to do that to make assessments about what might happen and begin to think about what you might do in that case, but you don't act until you, until you see much more than what we see now."
Future rate cuts predicated on more progress on inflation:
"We want to see further progress on inflation and the story's there, it's -- we're just going to have to see the data. At the end of the day, it comes down to 12-month inflation because that takes out the seasonality issues that may exist. And we're just going to need to see that. We think that, we think we see the pathway for that to happen. One example, a key example, is that you now do see owner's equivalent rent and housing services, the way it's calculated for PCE, you see that coming down pretty steadily now and that's the, that's the place where most of the remaining gap is. In addition, a big part of the overrun... was from non-market services, which don't tend to send much signal. So, you can look through all that, and think okay, that then we seem to be set up for further progress. But being seemed to set up for it is one thing, having it is another. So we're going to want to see further... progress on inflation. Remember... our goal is 2 percent and we do mean to get back sustainably at 2 percent."
Broad labor market strength weighed against certain indications of weakness:
"We look at... a very broad range... start[ing] with... the unemployment rate, employment, participation, wages, job quits, ... the ratio of vacancies to unemployed. We look at all those things. You put your finger though on - it's a low hiring environment... That's more typical of... the labor market is at a sustainable level, it's not overheated anymore. We don't think we need it to cool off anymore, we do watch it extremely carefully... nonetheless, overall... the labor market does seem to be pretty stable and broadly in balance."
How reduced migration will influence the unemployment rate:
"If [flows across the border and job creation] come down together, that sort of can be a reason for the unemployment rate to stabilize."
What further progress on inflation looks like:
"Inflation down to 2 percent sustainably is what we're trying to achieve. We're somewhat above that, as you know, and we want to see serial readings that suggest that we're making further progress on inflation."
How far we are from neutral rates:
"You can't know with any precision, of course... you know the neutral rate by its works. So, I think at 4.3 percent we're above pretty much everyone on the Committee's estimates of the longer-run neutral. I think our eyes are telling us that our policy is having the effects on the economy, that's really the question we ask... I would say we're meaningfully above it... I have no illusion that anyone knows precisely how much that is... but not knowing that, and having cut 100 basis points, means that it's appropriate... that we not be in a hurry to make further adjustments."
How the impact of tariffs in 2025 might be different from 2018-19:
"Things are a little different now. We've just come through a high inflation period... you're coming through a situation where we're not quite back to 2 percent, and that's just different. In addition, the trade, the kind of footprint of trade has changed a lot... I just think the range of possibilities is very, very wide. We just don't know - and I don't want to start speculating, as tempting as it is, because we really don't know... We don't know what's going to be a tariff, we don't know for how long or how much, what countries, we don't know about retaliation, we don't know how it's going to transmit through the economy to consumers. That's, that really does remain to be seen."
Balance sheet runoff:
"We do intend to reduce the size of our balance sheet to a level that's consistent with implementing monetary policy efficiently and effectively in our ample reserves regime. We're closely monitoring a range of indicators to assess conditions and that should provide signals, whether reserves are approaching a level that could be judged as, "somewhat above ample."
AI-related stock market themes:
"... what really matters for us is macro developments and that means substantial changes in financial conditions that are persistent for a period of time. So, I wouldn't put that label on these events, although of course we're all watching it with interest."
Stability of housing activity in the face of rising mortgage rates:
"... longer rates have gone up. Not because of expectations - not principally because of expectations about our policy or about inflation - it's more a term premium story... I think these higher rates are going to, they're probably hold back housing activities to some extent if they're persistent."
Whether Committee should wait until inflation has fallen back to target to cut rates again:
"I wouldn't say that. We've never said we need to be all the way at target to reduce rates. At any time what we're doing is we're looking at the economy and asking whether our policy stance is the right one to achieve maximum employment and price stability... We would want to see further progress, but we think our... policy stance is restrictive. Meaningfully restrictive. Not highly restrictive, but meaningfully restrictive... I would think we need to see further progress. I wouldn't say all the way back down to 2 percent on a sustainable basis."
On the threat of tariffs introducing business uncertainty:
"Trade policy uncertainty, if it's large and persistent, can start to matter for businesses making investment decisions and things like that. That's not something I'm observing today. It's very early days for this, but that did, I think, that did matter in 2018-19. And it's one, one of many things we'll be watching."
Asset bubble concerns stemming from market valuations:
"We look at - from a financial stability perspective - at asset prices generally, along with things like leverage in the household sector, leverage in the banking system, funding risk for banks, and things like that. And yeah, I'd say they're elevated by many metrics right now...we look at that mainly from our financial stability perspective and we think that there's a lot of resilience out there. Banks have high capital, and households are actually overall, not all households but in the aggregate, households are in pretty good shape financially... we look at overall financial conditions... you can't just take equity prices, you've got to look at rates too, and that, that represents a tightening in conditions with higher rates. So, overall financial conditions are probably still somewhat accommodative, but it's a mixed bag."
Risks to the assessment of broader labor market strength:
"...if there were to be a spike in layoffs, if companies were to start to reduce headcount, you would see unemployment go up pretty quickly, because the hiring rate is quite low. So that's one thing we look at. I think it's also, it's worth pointing out that for lower income households, they are, they're under significant pressure... we know that people at the lower end of the income spectrum are struggling with costs"
Comparisons to other periods of uncertainty:
"What we have now is a good labor market, we have the economy growing at 2 to 2 and 1/2 percent, inflation's come down to now the, the headline inflation number was 2.6 and that's what the public experiences. We look at core because it's a better indicator of future inflation. So, yes, the price level went up a lot for inflation, and people are feeling that and they're not wrong. But... the kind of uncertainty we have is just a usual level of uncertainty about the economy... I wouldn't compare it to the global financial crisis or anything like that - given that we have actually a very good economy right now."
Is a March cut still on the table?
"The economy is strong, the labor market's solid, downside risks to the labor market appear to have abated, and we think disinflation continues on a slow and sometimes bumpy path, that tells me and the other members of the Committee, the broad sense of the Committee actually is that we don't need to be in a hurry to adjust our policy stance."
Whether the Fed needs to see better-than-expected inflation data or simply readings in line with its forecasts:
"You know, it's one of those things we'll know it when we see it, but more the expectation is that we will make continued progress... it's going to have to be something that isn't just idiosyncratic, you're going to want to see continued progress with housing, services inflation, you're going to want to see inflation behaving in a way that builds confidence that we are really making progress... if we expect to see that, it's just a question of when."
Cryptocurrency and households:
"It's not really our bailiwick, you want people to be knowledgeable about the financial engagements that they have... you want households to have the chance to understand the risk that they're taking. I do think it would be helpful if there were a greater regulatory apparatus around crypto, and I think that's something Congress was working on quite a lot."
Sources
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