In the early hours of Thursday Beijing time, the Federal Reserve announced its latest monetary policy decision, pausing interest rate cuts for the second consecutive meeting, which was completely in line with market expectations. The closely watched dot plot showed that policymakers’ interest rate projection path was largely consistent with December’s, anticipating only one rate cut this year by 25 basis points, and similarly just one cut next year. Meanwhile, the policy statement added language about the uncertain impact of Middle East geopolitical tensions on the U.S. economy, and revised the description of the unemployment rate from “stabilized” to “essentially unchanged.”
Fed Chair Jerome Powell sent a clear signal during the subsequent press conference: the Fed will not return to a rate-cutting path until inflation resumes its cooling trend. He emphasized that it is too early to judge the impact of the Middle East conflict on inflation, as price pressures had already persisted longer than policymakers anticipated even before the conflict erupted. “What we really want to see this year, and it’s very important, is progress on inflation,” Powell stated. “If we don’t see that progress, then you won’t see rate cuts.”
These remarks reinforced a prevailing view in the market: with consumer price data remaining stubbornly high, the Fed is still quite far from restarting rate cuts. The persistence of inflation has even raised the possibility that the Fed’s next move could ultimately be a rate hike. Powell acknowledged that this option was again part of the policy discussions this week, though he added that it is not the baseline expectation for most policymakers.
According to the latest Summary of Economic Projections, Fed officials not only maintained the forecast of just one rate cut this year but also unexpectedly raised their forecast for U.S. economic growth, indicating they are not yet concerned about the potential dampening effect of higher energy costs. Concurrently, they raised their inflation forecasts, an adjustment Powell primarily attributed to short-term impacts from tariffs. Among the 19 officials who provided rate forecasts, a total of seven expect no rate cuts this year. Of the 12 who anticipate at least one cut this year, seven foresee one cut, two foresee two cuts, two foresee three cuts, and one expects four cuts.
Despite numerous uncertainties, Powell expressed optimism about the labor market outlook, noting that the unemployment rate has changed little since September. He also mentioned that current productivity improvements cannot be attributed to generative AI, as its impact will take many years to confirm. Instead, the construction of massive AI data centers is pushing up demand for goods and services, which could both add to inflationary pressures and potentially raise the neutral rate of interest.
Market reactions were mixed. Priya Misra from JPMorgan Asset Management stated that the Fed might be more concerned about inflation risks, as inflation data is further from its target compared to the unemployment rate. Former Fed Vice Chair Roger Ferguson expressed similar concerns, suggesting the Fed needs to focus more on price stability.
