FOMC holds rates in restrictive territory to continue pressure against inflation
Summary
On Wednesday, January 29, 2025, the Federal Open Market Committee (FOMC) voted unanimously to hold the fed funds rate at a target range of 4.25%–4.50%. The FOMC also chose to remove the reference to inflation making progress toward their goal, which the market viewed as a hawkish pivot. Concurrently, the statement mentioned that unemployment has stabilized at a low level over the past few months. Even though Chair Powell noted that the sentence was not meant to send a signal, the slight change in language caused swap rates to jump by 2–3 basis points across the curve. The committee continues to rely on economic data and will assess incoming releases regarding labor market conditions and inflation to help decide their path forward on rates. Chair Powell did state that the committee feels that the labor market is very strong, and they are not in a hurry to cut rates.
Impact on rates
After the meeting, swap rates were up 2–3 basis points across the curve as the market digested the meeting’s commentary as slightly hawkish and strengthening the higher-for-longer narrative. Chair Powell restated that the committee is not in a rush to cut rates and will continue to monitor incoming data as they balance their dual mandate of 2% inflation and maximum employment. Despite the need for balance, Powell’s statements re-emphasized the higher-for-longer sentiment.
Source: Chatham Financial
Source: Chatham Financial
Source: Chatham Financial
Moving forward
The market is now pricing in two 25-basis-point rate cuts by the end of 2025. Given Powell’s comments on the balance of the risks between the labor market weakening and higher inflation, the market will be highly attentive to data releases, adding to potential market volatility on days of those releases. Chair Powell noted both that the FOMC remains focused on their 2% inflation mandate and the higher risk of unemployment increasing due to the lowered hiring rate in the job market. The board believes that their current policy stance allows them the agility to adjust for any market data that shows deterioration of either goal. Chair Powell also stated that the board is closely monitoring the new administration’s policies as the change in administration adds to the uncertainty of the market.
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Disclaimers
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.
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