Fed stays on hold as expected
The Fed left interest rates on hold (4.25%-4.5%) following yesterday’s meeting, as widely expected. Mainly because of the impact of tariffs, it lowered its forecast for GDP growth in 2025 and raised its forecast for inflation this year, though inflation is still expected to fall back close to target in 2026. The Fed kept intact the possibility of a couple of 25bps cuts in interest rates both this year and next, though Powell reiterated that the central back is not in a hurry to lower rates. In terms of market reaction, US equities rallied and bond yields fell post the meeting, while the dollar initially retreated from its best levels of the day just before the Fed’s announcement before regaining ground. The euro and sterling are trading at around $1.0870 and $1.2970 respectively this morning, not much changed from yesterday morning, while EURGBP continues to hover just below £0.84. The Bank of England is up next – it announces its latest monetary policy decision at noon today with interest rates expected to remain on hold at 4.5%.
US equity markets closed 1%-1.5% higher on the day with most of these gains coming after the Fed’s announcement, though there hasn’t been much positive spill-over to European stocks which are little changed at the open today. In bond markets, US yields fell post meeting, by the best part of 10bps in the case of both 2-and 10-year yields, as the market priced back in a bit more in terms of expected Fed rate cuts this year (now at around 60bps). European yields are slightly lower at the start of play today.
In its post-meeting statement, the Fed noted that “economic activity has continued to expand at a solid pace, the unemployment rate has stabilized at a low level in recent months, and inflation remains somewhat elevated.” In its updated economic projections, it lowered its forecast for GDP growth this year to 1.7% from 2.1% in its December projections (after 2.5% in 2024) and raised its forecasts for headline and core inflation to 2.7% and 2.8% respectively, from 2.5% for both previously, with both expected to decline in 2.2% in 2026, close to the 2% target.
The focus today will be on the Bank of England’s latest monetary policy decision. Having lowered interest rates by 25bps to 4.5% last month, it is expected to stay on hold at today’s meeting as it continues its “gradual and careful” approach to easing policy. Ahead of the meeting, labour market data released earlier this morning shows employment rose and the unemployment rate was unchanged (4.4%) in the three months to January, while the annual rate of growth in average weekly earnings (excluding bonuses) was also unchanged (at 5.9%), all broadly in line with expectations.