The Federal Open Market Committee kept the federal funds rate in a range between 3.5% and 3.75% on Wednesday while signaling that it is in no rush to make reductions given the strong economy despite slower hiring and elevated inflation.
The FOMC also said that it would conduct standing overnight repurchase agreement operations at a 3.75% rate and reverse repurchase agreement operations at 3.5%.
Two Federal Reserve governors, Stephen Miran and Christopher Waller, dissented in favor of a 25 basis-point rate cut.
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The committee appears comfortable with the bottom range of 3.5% near the central bank’s estimate of the neutral rate of 3%—we think it’s 3.5%—so the wait-and-see stance of the FOMC will be the narrative despite the two dissenting votes.
The Fed upgraded its view of the economy by noting that economic activity “has been expanding at a solid pace,” which tends to suggest satisfaction with the policy rate’s current levels.
We expect that the economy will run hot in the first half of the year, closer to 3% in contrast to the long-term trend growth rate of 1.8%, which is likely to keep the Federal Reserve on hold with rate cuts.
Should the economy outperform this year, then the risk is not around rate cuts but rather no cut at all or even a late-year increase should employment hold up.
Given the fiscal tailwinds that are growing, our RSM US Financial Conditions Index strongly implies that the current policy stance is not restrictive and that further rate cuts carry the risk of stoking inflation and a greater risk to the economic outlook via the financial channel.
But should upcoming benchmark payroll revisions result in a substantially revised economic outlook, such a scenario could pull rates cuts forward. For now, though, it appears that July or September might present the first opportunity for a 25 basis-point rate cut.
The FOMC’s policy statement released on Wednesday provided an update on the committee’s outlook on inflation and employment in the opening paragraph.
The new language: “Available indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained low, and the unemployment rate has shown some signs of stabilization. Inflation remains somewhat elevated.”
The balance of risks implied by the statement lay in both directions as the committee signals it will hold off on rate cuts for now.
Fed Chair Jerome Powell’s news conference afterward did not disappoint and he attempted to keep the focus on the economy and steered his answers away from the conflict between the White House and the Fed.
The Justice Department, in a dramatic escalation of the executive branch’s pressure campaign on Powell, recently announced that Powell is under criminal investigation over his testimony concerning renovations to the Fed’s headquarters.
Powell did, however, comment on his commitment to preserving the Fed’s independence, which we think will be a large part of the economic narrative this year.
Powell’s comments stressed the economy’s underlying resilience while he noted weakness in the housing market, the toll taken by the government shutdown and the stabilization in the labor market, albeit at low levels.
As for inflation, Powell said that the Fed’s estimate of the personal consumption expenditures index had increased by 2.9% over 2025. During this time, he said, tariffs pushed up goods prices even as disinflation inside the service sector continued.
Questions from reporters were focused on central bank independence. Powell took the opportunity to note that the current case in front of the Supreme Court, regarding efforts to remove a Fed governor, Lisa Cook, was the most important in the Federal Reserve’s history.
Powell declined to comment on a video he released on Jan. 11 responding to his criminal inquiry.
Powell also refused to respond to questions about whether he will remain in his position as a Fed governor once his tenure as chair ends in May.
Powell also refused to address recent comments by the administration regarding the value of the dollar.
The takeaway
The Federal Reserve is in no hurry to cut rates as the economy is likely to run well above the long-run growth trend and employment stabilizes.
Powell also said that the case before the Supreme Court was the most important in the central bank’s history but eschewed multiple attempts to discuss the risks to central bank independence linked to that case and the administration’s efforts to reduce interest rates.
