As Expected, Fed Keeps Rates Unchanged but Notes Labor Market Stabilization

Meeting Highlights

• As expected, the Fed kept the funds rate range unchanged at 3.50% – 3.75%, with two Fed governors dissenting (Miran and Waller who wanted a 25bps cut). It’s not really surprising the pair dissented as Miran has done so at every meeting he’s attended, and Waller is still holding out hope that President Trump taps him to replace Powell as chairman.

• In relation to statement changes, they were just two of consequence. The statement noted that economic growth had expanded at a “solid” pace in today’s statement vs.  “moderate” growth last month. They also removed the line about downside risks to employment, implying some improvement in the labor market such that the risks are more in balance compared to December.

• Since this was not a quarter-end meeting there were no updated economic or rate forecasts. The only information coming from the meeting is the attached statement and the post-meeting press conference where Powell will add more color to today’s decision.

• Futures pricing prior to the announcement had odds for the next rate cut indicated for the June FOMC meeting. After today’s decision, those odds remain in place with 60% odds of a rate cut at that meeting (80% for a 25bps cut and 20% for 50bps).

• In the December FOMC rate and economic forecast, the Fed saw core PCE ending 2026 at 2.5% then dropping to 2.1% in 2027. Core PCE currently stands at 2.8% with the December release due on February 20^th, as the reporting agencies continue to backfill data after the October government shutdown.  Expectations are for the rate to remain unchanged at 2.8% with a monthly rate of 0.2%. The December forecast saw unemployment finishing the year at 4.4%, which is where it currently sits. The January jobs report will be released on Friday, February 6, with unemployment expected to remain unchanged 4.4%.

• In summary, the Fed delivered an as expected rate decision while recognizing some stabilization in the labor market, along with a modest improvement in economic growth, with inflation remaining elevated. The decision today and commentary are in line with market expectations which has kept market reaction muted across fixed income, equities, and currencies.

Dot Plot from December FOMC Meeting

Source: FOMC