"Preparing for" Trump's policies, the Federal Reserve paused interest rate cuts as scheduled, indicating a lack of confidence in inflation

Key Points:

The Federal Reserve's decision to pause interest rate cuts fully aligns with market expectations. Unlike the last rate cut, where there was one dissenting vote, this decision received unanimous support from policymakers.

The resolution statement removed references to a softening labor market and rising unemployment rates, instead stating that the labor market is robust and the unemployment rate has recently stabilized at a low level.

The statement deleted references to progress towards the 2% inflation target, reiterating that inflation remains elevated.

The statement continues to emphasize that the risks to employment and inflation are generally balanced, reaffirming considerations from the last meeting that hinted at a slowdown in the pace of rate cuts regarding future adjustments in "magnitude and timing."

"New Federal Reserve News Agency": The Federal Reserve has "entered a new wait-and-see phase," with the statement suggesting that, in the current inflation and labor market environment, the Fed is satisfied with its interest rate stance.

Interest rate analysts: This statement is more hawkish than the last one.

Faced with the uncertain economic impact of the Trump administration's policies, the Federal Reserve's decision at its first meeting this year was to remain steady, as the market anticipated. Compared to previous slightly adjusted resolution statements, it suggests that concerns about inflation have reignited among Fed policymakers since Trump took office, and they are not as confident that inflation will decline to meet their expectations.

On January 29, Wednesday, Eastern Time, the Federal Reserve announced that the Federal Open Market Committee (FOMC) decided to keep the target range for the federal funds rate unchanged at 4.25% to 4.5%. This marks the first pause in the current rate-cutting cycle initiated by the Fed last year. The Fed raised rates by a total of 525 basis points from March 2022 to July last year, and cut rates by a total of 100 basis points in three consecutive meetings starting in September.

This pause in rate cuts was entirely expected by the market. Earlier this month, after the U.S. Department of Labor announced that non-farm payrolls in December grew significantly beyond expectations, veteran Fed reporter Nick Timiraos, known as the "New Federal Reserve News Agency," exclaimed that "the employment report closed the door on a January rate cut." Recently, the market has been betting heavily on a rate cut in March. By the close of trading on Tuesday, CME tools indicated that the futures market expected a 99.5% probability that the Fed would not cut rates this week, with about a 30% probability of a rate cut in March.

Timiraos commented that this statement only contained "minor changes" to alert the market to recent economic developments, highlighting two key sentences: the labor market remains robust, and inflation remains elevated.

Timiraos pointed out in the title of his article that the Fed has "entered a new wait-and-see phase." The article begins by stating that the Fed has paused its recent rate-cutting measures and is entering a new wait-and-see phase, attempting to determine whether to cut rates and by how much. This statement suggests that, in an economic environment where inflation is still slightly above the Fed's target and the labor market is robust, the Fed is satisfied with its interest rate stance After the Federal Reserve's statement was released, market expectations for interest rate cuts this year have decreased. Ira Jersey and Will Hoffman, U.S. interest rate strategists at Bloomberg Industry Research (BI), commented that compared to last month's statement, this Federal Reserve statement is somewhat hawkish, and it is not surprising that the initial reaction in the interest rate market is a bear flattening.

Removed the easing of the labor market and changed to robust; deleted progress towards inflation targets and reiterated that it remains elevated

Compared to the last FOMC statement a month ago, this Federal Reserve decision statement only made some "fine-tuning." The changes focused on the first paragraph of the statement regarding the current state of the U.S. economy. First, the Fed reiterated that recent indicators suggest that economic activity continues to expand steadily, followed by the Fed's deletion and modification of the evaluation of the labor market and inflation situation.

Regarding the labor market, the last statement said: "Since earlier this year, the labor market conditions have generally eased, and the unemployment rate has risen but remains low."

This statement deleted the mention of the tightening of labor market supply and demand easing and the rise in the unemployment rate, changing it to: "In recent months, the unemployment rate has stabilized at a low level, and the labor market remains solid."

On inflation, the last statement wrote: "Inflation has made progress towards the (FOMC) Committee's 2% target but remains elevated." This statement deleted the first half of the sentence regarding progress towards the 2% Fed target, only retaining the latter part, changing it to: "Inflation remains (somewhat) elevated."

Reiterated that employment and inflation risks are generally balanced, considering the "magnitude and timing" of future interest rate adjustments

The other content of this statement largely follows the wording of the last statement.

The Federal Reserve continues to reiterate that "the risks to achieving employment and inflation targets are generally balanced," once again reaffirming its commitment to bringing inflation back to the Fed's target of 2%, and it continues to replicate the increased focus on employment goals added in last September's statement, including stating that the FOMC "is firmly committed to supporting maximum employment" and that the FOMC "is concerned about the two-sided risks facing its dual mandate."

This statement also maintains the relevant wording, "In assessing the appropriate stance of monetary policy, the Committee will continue to monitor how subsequent information affects the economic outlook."

The main change in the last statement compared to the previous one was the addition of the terms "magnitude" and "timing" when considering future interest rate adjustments. At that time, Timiraos commented that by adding "magnitude and timing," the Federal Reserve hinted that the pace of interest rate cuts would slow. This Federal Reserve statement replicated the addition of this wording from last time:

"When considering the degree and timing of a new adjustment to the target range for the federal funds rate, the (FOMC) committee will carefully assess future data, evolving prospects, and the balance of risks."

Another difference from the last statement is that this time the decision to pause interest rate cuts received the support of all voting members of the FOMC. In the last meeting, one member voted against the decision to cut rates by 25 basis points. The dissenting member, Cleveland Fed President Beth M. Hammack, advocated for keeping rates unchanged, supporting the pause in rate cuts from last month.

Regarding the reduction of the balance sheet (quantitative tightening), this statement reiterates that the FOMC will continue to reduce its holdings of U.S. Treasury securities, agency debt, and agency mortgage-backed securities (MBS). In other words, the Federal Reserve's plan for quantitative tightening (QT) remains unchanged.

The following red text highlights the deletions and additions in this decision statement compared to the last one.