A neutral hold, with political risks creeping into the background.
Key takeaways
- We expect no further cuts while Jerome Powell remains Chair of the US Federal Reserve (Fed)
- Easing is likely to resume once a new Fed chair is in place in May
- Powell takes a more confrontational stance against the Trump administration
The Fed left rates unchanged as expected, maintaining the Fed funds target range at 3.5–3.75 per cent. The accompanying statement retained language on forward guidance, continuing to note that “the extent and timing” of future easing will be contingent on data, with two dovish dissents counterbalanced by firmer language on growth and the labour market, underscoring the neutrality of this hold.
At the press conference, Chair Jerome Powell continued to lean on the line that the Federal Open Market Committee (FOMC) is “well positioned”, saying it is looking to let “the data light the way for us”. This patience for more data is likely to be greater now than it was six weeks ago, with data prints so far largely tracking the Fed’s baseline scenario of contained unemployment risks alongside continued disinflation.
Politics cloud the months ahead
Looking ahead, we still expect no more cuts from the Powell Fed, with this committee likely to view the balance of risks to inflation and the labour market as being broadly in equilibrium. Instead, what is likely to drive markets over the rest of Powell’s term is the variety of legal proceedings and political developments affecting the Federal Reserve and the Board of Governors.
We are particularly watching the Department of Justice’s subpoenas, and the Lisa Cook case currently before the Supreme Court, as a guide to the rate of politicisation of the Federal Reserve. Indeed, Chair Powell made a point of explicitly pushing back against recent administration criticism of his attendance at the Lisa Cook Supreme Court hearing, stating plainly that there is clear precedent for doing so.
This willingness of Powell to take a more confrontational approach with the Trump administration explains another key factor we are tracking: whether Powell remains a governor of the Fed after his term as Chair ends in May. Were he to do so, it is likely the market would view his continued presence on the Board as a counterbalancing move against over-politicisation of the Fed.
Looking beyond this Powell Fed, we expect a renewed easing cycle to kick in once a new Fed chair is appointed in May. That means three cuts in the second half of this year, almost two more than market is pricing for H2. This renewed easing cycle is likely to be more forward-looking, putting particular emphasis on strong productivity growth assumptions. This reaction function, which will place less weight on near-term data outcomes, is likely to add to upside inflation risks in the latter half of this year, as the Trump administration attempts to run the economy hot with additional fiscal stimulus ahead of the mid-terms. In our view, this policy stance is highly likely to play out regardless of who the next Fed chair is, with the appointment instead more likely to influence the extent to which the Fed’s balance sheet again becomes an active policy lever.
