The US Federal Reserve held interest rates at 4.25%-4.5% at its Federal Open Market Committee meeting yesterday (30 January 2025).
The decision to hold, which was largely expected by the broader market, comes as US inflation remains 90 basis points above target at 2.9%, alongside the US economy remaining at close to full employment.
Daniela Sabin Hathorn, senior market analyst at Capital.com, said the FOMC’s accompanying statement “once again defended a hawkish stance” with the absence of “any reference about inflation making progress towards the 2% target”.
“It also notes that economic activity has continued to expand at a solid pace while the unemployment rate has stabilised at low levels,” she explained. “While the central bank notes it is attentive to risks to both sides of its dual mandate, the vote to leave rates unchanged was unanimous, suggesting the current pause in rates will likely be extended further.”
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While markets anticipated that the Fed would hold firm on rates, the decision comes one week after US president Donald Trump demanded an interest rate cut at the World Economic Forum.
Richard Flax, chief investment officer at European digital wealth manager Moneyfarm, said the move will “no doubt frustrate Trump” as the central bank “clearly adopt[s] a wait-and-see approach”.
“Policymakers are likely assessing the impact of the president’s policies on inflation and the broader economy, particularly as his stances on immigration and tariffs continue to unfold.”
Kambiz Kazemi, chief investment officer at Validus Risk Management, described the polarisation between Trump and the Fed’s views on rates as “the first round of monetary policy stand-off” between the two parties. “In fact, the Fed’s latest statement struck a slightly hawkish tone by suggesting unemployment may have bottomed out, indicating that it views the labour market as robust.
“This position will likely intensify Trump’s criticism over the coming months, and given his inclination to challenge the status quo, we may even see proposals to amend the Federal Reserve Act or alter the Fed’s mandate.”
US bond market ‘likely to stay under pressure’
Reacting to the news, the S&P 500 index initially fell by 0.7% yesterday, but quickly recovered some ground throughout the course of the day. Meanwhile, the US dollar and bond yields edged higher.
Hathorn said: “In the midst of the current earnings season and following the shock seen earlier this week after DeepSeek entered market consciousness, the impact of the FOMC meeting was expected to be limited.
“There may be some added focus on Powell’s commentary in the upcoming press conference, but he is unlikely to give away any new information about the central bank’s forecasts. Market pricing continues to show around 45 basis points of cuts priced in for 2025 after the softer core CPI reading in December increased the odds.”
Daniele Antonucci, chief investment officer at Quintet Private Bank, said the US central bank “isn’t likely to cut rates again in the near term” given the strength of US economic growth.
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He said: “As there’s still significant uncertainty around the timing of any Fed move, the US bond market is likely to stay under pressure, especially as any fiscal stimulus might add to inflationary concerns.
“Because of this, and also taking into account that there’s a risk that the extra supply to US bonds might be tough to digest, we’re underweight US Treasuries and prefer short-dated bonds in Europe where the European Central Bank is likely to cut more rapidly, given economic weakness.”
Elsewhere, he remains “slightly overweight US equities as he thinks “growth prospects and deregulation will be supportive”.
“At the same time, given demanding valuations in tech and market concentration, we diversified our exposure into more attractively valued sectors such as industrials and financials that might benefit from US fiscal stimulus.”
This story was written by our sister title, Portfolio Adviser
