Market "calm" response after interest rate decision: Is the Federal Reserve's policy now "irrelevant"?

According to the Zhitong Finance APP, the Federal Reserve maintained interest rates on Wednesday as expected, and the U.S. Treasury market reacted mildly. Some experts believe that as market trends shift, the Federal Reserve's policy influence has significantly weakened.

Due to a slowdown in progress to curb inflation, the Federal Reserve announced on Wednesday that it would keep interest rates unchanged, in line with widespread market expectations, leading to a brief rise in U.S. Treasury yields. However, Federal Reserve Chairman Jerome Powell stated after the meeting that he expects inflation to continue to slow and yields to decline.

At the close on Wednesday, U.S. Treasury yields were basically flat. The benchmark 10-year U.S. Treasury yield remained at 4.53%, while the two-year Treasury yield rose by 2 basis points to around 4.2%.

BlackRock portfolio manager Jeffrey Rosenberg stated, "The Federal Reserve is not in a hurry to take any further action."

The Federal Reserve's decision to pause the interest rate cut cycle that began last September has become a common expectation in the market. Since the end of last year, U.S. Treasury yields have risen sharply as the market anticipates a strong economy, persistent inflation, and that President Trump’s policies will prevent the Federal Reserve from further easing monetary policy.

This repricing has kept traders largely in sync with the Federal Reserve. The Federal Reserve is taking a wait-and-see approach, waiting for inflation to return to the target of around 2%. Trump has also threatened to impose tariffs on imported goods and promised to lower tax rates, both of which could exert upward pressure on inflation.

Interest Rate Cut Expectations Hit Again

Powell provided little guidance on the direction of the bond market. He stated that rates, which are expected to remain at restrictive levels, will continue to slow inflation, which seems to alleviate some concerns about the Federal Reserve possibly raising rates again. He also declined to comment on how Trump's policies might affect the Federal Reserve's path, emphasizing that the Federal Reserve will follow the guidance of the data.

Bob Michele, Chief Investment Officer of Global Fixed Income at JP Morgan Asset Management, stated, "This does not sound like the Federal Reserve is looking for the next opportunity to cut rates."

After Powell's remarks supported this speculation, swap traders lowered their expectations for a rate cut by the Federal Reserve this year, now anticipating a cut of 43 basis points, down from 48 basis points before the Federal Reserve's decision was announced, with the first cut expected in mid-2025.

The U.S. stock market's reaction was similar to that of the bond market. The S&P 500 index fell after the Federal Reserve's decision was announced but rebounded somewhat after Powell's speech. Due to concerns over Trump's tariff policies and the threat posed by Chinese company DeepSeek's launch of low-cost artificial intelligence products to U.S. tech stocks, the S&P 500 index closed slightly lower that day.

Lon Erickson, a portfolio manager at Thornburg Investment Management, stated, "There is a growing cautious sentiment in the bond market. People are uneasy about the U.S. government's policies."

Wall Street economists have differing predictions regarding the Federal Reserve's policy path, although most economists have lowered their expectations in recent months. Ahead of the January meeting, only Morgan Stanley among the major Wall Street banks still believes that the next meeting in March may see a rate cut Guneet Dhingra, head of U.S. interest rate strategy at BNP Paribas, stated: "In terms of the bond market, we believe it will remain unchanged in the coming quarters. We think the Federal Reserve will keep rates unchanged for the remainder of 2025."

Is the Federal Reserve's policy no longer relevant?

Bloomberg strategist Edward Harrison believes that the importance of the Federal Reserve's policy has significantly diminished for financial markets. He stated: "Given the current macro risks, whether the Federal Reserve cuts rates by 25 basis points or keeps rates unchanged is no longer relevant. The market not only expects the Federal Reserve to keep rates unchanged but also anticipates that the Federal Reserve will remain inactive in the future."

In contrast, Harrison believes that the impact of Trump's policies and the turmoil in the artificial intelligence sector have a greater effect on the overall market in the near term. Trump's policies could drive up inflation and trigger panic over interest rate hikes, negatively impacting financial assets.

The bigger risk is the bursting of the artificial intelligence bubble. Harrison stated that if DeepSeek can achieve outstanding results on a limited budget, it means that a large amount of money invested in artificial intelligence has been wasted. Ultimately, "large tech companies need to demonstrate profit growth from their investments in artificial intelligence. If they do not, their stock prices will be hit."