This was a good meeting for Chair Powell: he provided an upbeat view on the economy yet left financial markets largely unmoved. As expected, the Fed held rates steady.
His press conference remarks signal no haste to shift policy. The next move is more likely to be down than up, but the committee will wait for the data to guide its final calibration. We still anticipate just one more rate cut this year to a terminal rate of 3.25-3.5%, our neutral rate estimate.
Unchanged policy rate
The Fed left its policy rate unchanged, as widely expected. Two governors dissented: Christopher Waller and Stephen Miran both voted for a 25bp cut. Miran’s dissent came as no surprise. Waller’s was more unexpected, and we cannot exclude that this was an effort to keep his name in the leadership race.
Upbeat statement on the economy
The statement itself struck a more upbeat tone than in December. The FOMC dropped its reference to rising downside risks to employment, noting instead that “the unemployment rate has shown some signs of stabilization”. It was also more positive on growth, judging that “economic activity has been expanding at a solid pace”. At the press conference, Jerome Powell sounded quite optimistic. He argued that the year has started on a “strong footing”, has repeatedly proved to be more resilient than expected, and will receive additional support from fiscal policy later this year.
Powell: inflation should come down again
Powell also appeared relatively relaxed about inflation. He suggested that the pass-through from tariffs is likely to peak in the second or third quarter. With services inflation already on a disinflationary path, the base case is that core inflation will resume its decline once tariff effects fade – we are less sanguine – stronger demand and a retightening of the labour market should slow down that process. In short, the trade-offs embedded in the Fed’s dual mandate look less acute: downside risks to the labour market and upside risks to inflation have both receded.
Fed is in no rush to change its stance
That leaves the Fed comfortable with the current stance. Most officials still judge the neutral rate to be a bit lower than today’s policy rate, with 3.5 -3.75% making the upper band of plausible estimates. But Mr. Powell stressed that the committee can afford to let the data guide the final steps. In our view, that points to just one further rate cut, probably in the third quarter.
Strong statement about the importance of independent central banks
Chair Powell also declined to engage with political attacks on the Fed and on himself. He closed, however, with a firm defence of central bank independence, a norm across advanced democracies. Independent central banks, he argued, have served the public well – not because they never make mistakes, but because their judgments are grounded in data rather than electoral calculation.
By Raphael Olszyna-Marzys, international economist at J. Safra Sarasin Sustainable Asset Management
