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29 Jan, 2025 20:31 29 Jan, 2025 20:31

Fed decision to stand on the sidelines seen by some as a 'hawkish hold'

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US Federal Reserve chairman, Jerome PowellFederal Reserve

America's central bank stood pat on monetary policy as economists had anticipated and appeared to be biding its time before making any further changes to interest rates.

The Federal Reserve kept its target range for official short-term interest rates at 4.25-4.50%.

"The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance," the Federal Open Market Committee said in its policy statement.

"The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate."

During his press conference, Fed chief, Jerome Powell, added that policymakers would focus on achieving further progress on bringing inflation back to target.

Powell also said that monetary policy was currently "fairly restrictive" and that it was not necessary for inflation to have moved all the way back to 2% before the Fed moved.

Paul Ashworth at Capital Economics labelled the Fed's policy statement as "hawkish" at the margin.

"The FOMC is happy to remain on the sidelines, as it awaits more clarity on the potentially stagflationary mix of fiscal, trade and immigration policies that the incoming Trump administration appears to be embracing," he told clients in a research note.

"[...] If the Fed doesn't resume cutting in the next few months, however, we suspect the window will have closed. While markets are still pricing in second half rate cuts, our view is that a flurry of tariffs will put a stop to that, as inflation rebounds to 3%."

By 2021 BST, Fed Funds futures were discounting a probability of 89.2% that the central bank would cut rates by an additional 25 basis points by the end of 2025 and 59.5% odds of 50bp worth of cuts.

Analysts at ING chipped in saying: "The hawkish tilt from officials may in part be a message to President Trump that they won't bow to his will on interest rates and suggests a clear and unambiguous weakening in the data is required to prompt further action. We think it will come, but not before June."

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