Fed stays on hold as expected

The Fed left interest rates on hold at yesterday’s meeting, as expected, and upgraded its assessment of the economy and the labour market, indicating steady policy for the period ahead. The dollar briefly extended its gains following the meeting before giving up ground again subsequently. The euro is trading just shy of $1.20 against the US currency this morning, up about a cent from a post-Fed meeting low of just under $1.19 and not much changed from this time yesterday morning. Sterling has rebounded to around $1.3840, not far off its high for the week so far (circa $1.3870), and is also a touch firmer against the euro at £0.8655.

There wasn’t a whole lot of action in government bond markets pre or post the Fed meeting. US yields ended largely flat across the curve, with UK yields also essentially unchanged and German yields only marginally lower. In equity markets, US stocks were unchanged on the day, while European indices underperformed, shedding around 1%, with the stronger euro over the past few days perhaps weighing on sentiment.

Having cut three times over the final few months of 2025, the Fed left its policy rate unchanged (in a range of 3.5%-3.75%) at its first meeting of 2026. It upgraded its assessment of the US economy and the labour market, saying that “economic activity has been expanding at a solid pace…and the unemployment rate has shown some signs of stabilization”, while noting that “inflation remains somewhat elevated,” indicating that it will be content to keep rates on hold for the period ahead. This is already largely reflected in market expectations, with the next 25bps cut not fully priced in until July.

ECB member Villeroy, commenting on the euro, said “we are closely monitoring” the currency’s appreciation and its “possible consequences in terms of lower inflation,” noting that “this is one of the factors that will guide our monetary policy and our decisions on interest rates over the coming months.” We will hear the ECB’s formal take on the currency’s recent rise following the Governing Council monetary policy meeting this day next week.

Looking to the day ahead, economic data due include the Economic Sentiment Indicator for January and money supply & credit growth for December in the Euro area, and weekly jobless claims, factory orders (November), and the trade balance (November) in the US.