First, the bottom line: Fed shifts to wait and see
- As expected, the Fed’s decision to stand pat today provides a few key signals. From a policy perspective, it suggests that policymakers prefer to tread lightly and evaluate the effect of their three prior cuts and that the balance of risks hasn’t tipped so far toward further deterioration in the labor economy that additional easing is urgently needed.
- The decision may also quietly signal that they aren’t going to bend in the face of political pressure to cut rates further in the absence of what they view as compelling economic and fundamental policy rationale to do so.
No surprise today, but what’s next?
- Today’s FOMC decision to hold the central bank’s benchmark policy rate steady at a rate of 3.5 – 3.75% delivered what markets had overwhelmingly expected. If there’s any surprise for the markets, it will have to be delivered as part of Fed Chair Jerome Powell’s press conference.
- Those comments will be scrutinized closely for any indications of the prevailing mood within the FOMC and what factors and data points policymakers may focus on in the coming months as they evaluate conditions and plan their next steps.
- Updated data in the Fed’s December Summary of Economic Projections provided meaningful insights into their thinking already; it’s unlikely that broad-brush expectations have changed materially in the interim.
- The question of how much further the Fed can comfortably trim — or feel the need to — remains front and center. On that note, the evolution of the Fed’s estimate of its neutral policy rate is telling. With the neutral rate having moved up to around 3.0%, there appears to be limited room for further cuts without policy moving into accommodative territory. That would be a policy pill too tough to swallow in the absence of a sharp slowdown in growth, particularly while inflation is still running solidly above the Fed’s 2.0% target.
- All indications are that the economy maintained strong momentum into year-end, with the lackluster hiring environment seemingly being an anomaly in an otherwise solid picture. Signs that the labor economy may be firming provide leeway for the Fed to tread carefully and seemingly reduce the urgency for the Fed to trim further.
- A pause now doesn’t eliminate festering frustration about still elevated inflation or the impact on consumers and businesses that are still absorbing the effects of rising prices in recent years. At the margins though, it would appear to reduce the risk that the Fed cuts too aggressively and in turn creates the conditions for an unwanted reacceleration in inflation in the near term.
Behind the vote: Be careful to not read too much into the dissents
- The decision to hold was broadly supported by the committee, but not unanimously so. Consistent with his prior stance that rates should be lower, Fed Governor Stephen Miran dissented, instead favoring a quarter-point cut. Even Miran’s stance appears to be moderating though, suggesting that he sees less pressure to cut — a notable development given his aggressive easing bias since joining the Fed last year.
- Also notable was Christopher Waller’s dissent in favor of a quarter-point cut given indications that he’s on the short list of candidates who may be nominated to succeed Jay Powell in the coming months. With the nomination decision in President Trump’s hands and his decided predisposition toward pressuring the Fed to cut rates more aggressively, Waller’s dissent may be indicative of his concern about lackluster labor conditions and the need for further insurance cuts against further downside.
- Conversely, questions have already arisen about whether his dissent was perhaps a signal to Trump that he’s sympathetic to his desire for lower rates. That could be interpreted as a cynical assessment given Waller’s longstanding presence and strong reputation within the Fed. It’s also notable that the Fed’s December projections indicated that another cut sometime in 2026 was expected. Whether he’s ultimately the president’s choice to lead the Fed remains to be seen, but Waller’s preference to cut another quarter point now versus later could be as simple as a question of timing or difference in assessment of the relative risks to the central bank’s dual mandate.
- Further, dissents within the committee have become more commonplace in recent years; Waller previously dissented at the Fed’s July 2025 meeting, when he also advocated for a quarter-point cut versus the Fed’s decision to leave its policy rate unchanged.
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