Fed Recap:

by Michael P. Reinking, CFA - Sr. Market Strategist

After cutting rates for three consecutive meetings by a total of 100bps the FOMC left the Fed Funds target rate unchanged at 4.25% - 4.5%, as widely expected. There were only minor changes to the statement with the language describing labor market conditions upgraded slightly, while saying inflation remains somewhat elevated removing the phrase “has made progress toward the Committee’s 2 percent objective”. There were no other changes to the statement and the vote was unanimous. There was nothing surprising in the statement but on the margin, you could argue that the description of the economic backdrop was slightly hawkish. Treasury yields had been moving higher throughout the morning and ticked up an additional 3bps after the statement. Equity markets also pulled back modestly retesting the session lows ahead of the press conference.

Chair Powell’s prepared remarks were innocuous. Early in Q&A he explained that the change in the statement regarding inflation was just to clean up language and not meant to send a signal. This quickly caused yields and equity markets to reverse the post statement move. The conversation about the neutral rate consistently came up during the press conference with the Chairman suggesting that rates were now much less restrictive than before the cuts, though he still believes they are “meaningfully above” neutral.

His broad message was very similar to what we heard in December - that policy is in a good place and that the Committee will monitor data and Washington policy changes going forward to guide them. He said we are in “no hurry” and in “wait and see” mode, needing to see real progress on inflation or weakness in the labor market before making further cuts. He once again suggested that he believed inflation would continue to move back towards their target pointing to a potential tailwind from shelter but that rate cuts could happen before hitting the 2% target. He also strongly reiterated that there is no discussion of changing that goal during their policy review.  In terms of the labor market, he continued to highlight that the moderation in the labor market is primarily happening from a slowdown in hiring not separations and that he does not view it as a source of inflation.

There was some speculation that the Chairman could start to offer some clues on QT but when asked, his answer was boilerplate and said that they are monitoring reserves which they still see as abundant providing no clues (the Bank of Canada was the first major central bank to end its QT program earlier today). Throughout the press conference he was asked to comment about President Trump and potential policy, but did not take the bait, steering clear of the cross hairs.

Today was pretty much as expected without any real surprises. As I said following the December meeting, it still feels like Chair Powell wants to cut rates but needs the data to cooperate and he is in no hurry.

Treasury yields ended the day up 1-3bps across the curve, right where they were at 2:00. Major US equity indices ended the session modestly lower but also pretty much unchanged over the final two hours of trade. For the record, despite all of the volatility seen over the last month and a half the S&P 500 ended 10pts lower than where it closed the day before the last Fed meeting.

A quick look ahead: The fireworks after the close have begun with multiple major tech companies reporting. Investors will be listening closely for commentary on DeepSeek and if/how they are reacting. Microsoft and Meta have just recently increased their capex budgets and will likely talk about this being the long game and don’t expect to hear any shift on that front. We’ll see if Microsoft addresses any improprieties with access to Open AI. Skepticism aside I’d expect some commentary talking about how delivering AI technology more cost effectively would be a positive for broader adoption.

This evening Brazil's central bank is expected to hike rates by 1% to 13.25%. Tomorrow morning the ECB is expected to cut by 25bps. In terms of economic data overnight preliminary GDP and inflation data will come out of the EU. In the US, claims, GDP and pending home sales will be released along with another busy morning of earnings. Tomorrow is also month end and for those following seasonal indicators barring a very sharp selloff the month will end in the green avoiding all three of the January Indicator Trifecta ending in the red.

 

Earnings:

After-Market: AMP, CALX, CHRW, CLB, DLB, ETD, IBM, LRCX, LSTR, META, MSFT, MTH, MXL, NLY, NOW, RJF, TER, TSLA, TTEK, URI, WDC, WM

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After-Market: AAPL, AJG, BKR, BOOT, DECK, EMN, GEN, HIG, INTC, KLAC, LPLA, OLN, PPG, RMD, V, WY

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