As expected, the Federal Open Market Committee (“FOMC”) held the fed funds target rate steady at 3.50% to 3.75% following their January meeting. After three dissents in the December meeting, only Christopher Waller and Stephen Miran dissented this meeting, with both calling for a 25-basis point cut. This marks the fourth straight dissent for the recently appointed governor whose term expires this Saturday, although there is no current word on the potential or timing of a replacement. As for Waller, while he is one of a small group of finalists to replace Fed Chair Jerome Powell, he has been on record with his continued concerns about the labor market. Worth noting, the Fed also added four new voters to the mix – Cleveland Fed President Beth Hammack, Philadelphia Fed President Anna Paulson, Dallas Fed President Lorie Logan, and Minneapolis Fed President Neel Kashkari. Cycling off were Susan Collins, Alberto Musalem, Austan Goolsbee, and Jeffrey Schmid.
There were some important, albeit not unpredicted, changes to the Fed’s statement. The FOMC noted that economic activity has accelerated at a “solid pace” and while job gains have remained low, there have been “signs of stabilization” in the labor market. In addition, the statement pointed to a still elevated level of inflation but did not elaborate further on the trend. On closer inspection, it would appear that the FOMC has become more comfortable with the belief that the labor market is not on the precipice of further deterioration. While job gains have been admittedly underwhelming, there has been little growth in the supply of labor as well, which is helping to maintain a better balance than one would expect given the trailing three month average for non-farm payrolls stands at -22k. Overall, the statement pointed to a more balanced view of the risks to the Fed’s dual mandate.
During the press conference, Powell acknowledged several concerns: housing has been “weak”, hiring is “low”, and the demand for workers has “clearly softened.” However, Powell reinforced the slightly more hawkish statement, stating that the Fed sits today within the estimates of the neutral range, albeit at the higher end in the eyes of some voters. For those looking for some dovish signs, Powell did state that the Fed continues to see tariff inflation as “one-time” and stated that “a lot of” the pass through of higher tariffs has already occurred. This points to the ability for the Fed to act more decisively on any weakening in the labor market, akin to the actions the Fed took in 2025.
In addition to queries related to monetary policy, Powell fielded several questions about his recent attendance of the oral arguments in Governor Lisa Cook’s case before the Supreme Court, political pressure on the Fed and the DOJ case, his plans after his term as Chair concludes in May, and his views on the dollar – all of which resulted in no new information. He did state that he believes the Fed has maintained its credibility and that he and other Fed officials are committed to Fed independence, advising his successor to “stay out of elected politics” and remain engaged with Congress.
Today’s meeting did little to move markets or change minds on the path of rate cuts. With another one to two rate cuts likely this year, and a global economy that is reaccelerating, our view on risk assets remains constructive. We are leaning into small and mid-caps and have upgraded emerging markets – especially India and Brazil – on better growth prospects and cheaper valuations. We are encouraging reallocating cash and recommend adding exposure to non U.S. developed bonds and emerging market debt, where valuations and policy backdrops look more attractive. Within alternatives, we remain overweight commodities (notably gold and other precious metals) and private equity, while staying neutral on private debt given rising credit risks.
