Fed’s “Hawkish Hold”. Let the Rotation Commence
The Federal Reserve unanimously voted to maintain interest rates at 4.25%-4.5% as officials navigate a complex economic landscape characterised by ongoing inflation concerns and growing uncertainty surrounding President Trump's trade policies. In their first meeting for 2025, Fed officials noted that inflation remains "somewhat elevated" whilst notably removing previous language about progress toward their 2% target—a shift suggesting heightened caution despite having implemented a full percentage point rate reduction in late 2024.
During his presser, Fed Chair Powell stressed that the central bank "does not need to be in a hurry to adjust our policy stance," emphasising the labour market's stability and indicating that employment conditions are not currently driving inflation significantly.
The Fed's “hawkish hold” comes amid growing tension with the newly inaugurated President Trump, who has already begun pressing for immediate rate cuts while simultaneously threatening new tariffs on Mexico, Canada, and China that could complicate the inflation picture. While some warn these tariffs could fuel inflation, we have stated that the impact on inflation could be minimal. A sentiment echoed by others, including Fed Governor Waller.
The central bank is adopting a measured stance, with Powell indicating that future rate decisions will be data-dependent whilst highlighting the significant progress achieved toward the Fed's objectives over recent years. Additionally, the Fed has launched a policy framework review, scheduled for completion by late summer, adding another layer to their decision-making process.
Separately, the Fed’s policy committee is undergoing its regularly scheduled rotation for 2025, with four new voting members joining the Federal Open Market Committee (FOMC). The incoming presidents are Austan Goolsbee (Chicago Fed), Susan Collins (Boston Fed), Alberto Musalem (St. Louis Fed), and Jeffrey Schmid (Kansas City Fed), replacing Thomas Barkin (Richmond Fed), Raphael Bostic (Atlanta Fed), Mary Daly (San Francisco Fed), and Beth Hammack (Cleveland Fed).
The 12-member FOMC comprises five Fed governors, the New York Fed president (holding a permanent vote due to New York's status as the financial capital), and four rotating positions from other regional Fed banks. As new members join, the committee's views appear to be shifting from the centre toward the extremes, potentially steering the group in a more hawkish direction that favours maintaining higher rates for extended periods.
This transition arrives at a crucial moment as the Fed balances inflation control with economic stability through its interest rate policies. Whilst there seems to be consensus on maintaining current rates in the near term, the broadened spectrum of perspectives among voting members could lead to policy gridlock or dissenting votes as 2025 progresses.
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