Fed holds rates unchanged, focus is now on both sides of the Fed’s dual mandate

Miran and Waller dissent, evolving priorities?

As widely priced in, the Fed held the target rate at 3.50% - 3.75% via a 10-2 split decision – Fed Governors Stephen Miran and Christopher Waller both voted to cut the rate by 25 bps. This follows three consecutive 25-bp rate cuts at the tail end of last year.

For Miran, this was interesting. He moderated his policy approach from December’s bumpier 50-bp cut preference to 25 bps; Waller, on the other hand, pivoted from December’s hold position to advocating for a 25-bp reduction. Both merit attention, given their names remain firmly in the hat for the new Fed Chair pick later this year.

Political undercurrents and votes

The notable shift in voting dynamics is telling, inviting speculation about the motivations behind the recent votes. For example, Miran’s call for a slower pace of easing following three consecutive meetings where he opted for 50-bp cuts suggests he may want to appear a more measured or credible Committee member ahead of Trump's Chair selection in May.

Waller's abrupt reversal – from holding in December to cutting in January – raises questions about whether he's attempting to differentiate himself in the Chair race, despite prediction markets placing him third behind Rick Rieder and Kevin Warsh.

Governor Michelle Bowman's decision to vote to hold rates may suggest she recognises she's no longer in contention for the top position. Recent reports indicate Bowman has been removed from the shortlist, leaving Rieder, Warsh, Kevin Hassett, and Waller – the only active Fed Governor among them – as the remaining candidates.

This creates an interesting dynamic: if Trump selects anyone other than Waller, he will likely need to replace the new Chair with Miran, whose term expires shortly. US Treasury Secretary Scott Bessent has indicated an announcement could come within ‘the next week or so’.

Rate statement and Powell’s presser

The accompanying rate statement witnessed a handful of notable changes. First and foremost, the Fed upgrading its economic activity assessment from a ‘moderate’ pace to ‘solid’ marks a shift reinforced by the recent estimate for Q3 25 GDP jumping to 4.4%.

Language around the jobs market evolved in a more positive direction. While December’s statement stated that job growth had slowed, January's communication says that ‘job gains have slowed this year’, suggesting stabilisation rather than deterioration. The January statement also underscored that the unemployment rate has shown ‘some signs of stabilisation’, offering a more optimistic tone on unemployment from December’s wording, which mentioned the jobless rate ‘edged up’.

Finally, and most importantly, I feel, was the complete removal of ‘downside risks to employment rose in recent months’. January's statement simply said that ‘The Committee is attentive to the risks to both sides of its dual mandate’, signalling the Fed views risks as more balanced now than in recent months.

On inflation, the January statement dropped the phrase ‘moved up since earlier in the year’, while maintaining that inflation remains ‘somewhat elevated’. The policy rationale also shifted: December's rate cut was justified ‘in light of the shift in the balance of risks’, while January's decision to hold rates steady omitted any reference to shifting risks.

In terms of further easing, the Committee noted: ‘In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks’. This essentially notes that the Fed will maintain flexibility going forward.

Finally, Powell’s press conference delivered little that we did not already know. He noted that the economy is on a ‘firm footing’, but unemployment remains at 4.4% along with weak job growth. The Fed Chair underscored that decisions will be based on incoming data and be made meeting by meeting; he also stated that the Fed is well positioned to tackle risks on both sides of the dual mandate. Alongside stating that PCE inflation remains elevated, he delivered a strong defence of central bank independence and even offered advice to his successor to ‘stay out of politics’, a thinly veiled commentary on recent political pressures facing the institution.

What is the Fed saying and what does this mean for markets going forward?

What the Fed are essentially saying here is that they are not locking themselves into a predetermined path and are keeping their options open to see how the economic situation develops before making their next move on rates.

Ultimately, we can expect the Fed to remain on hold for the time being, though markets are still expecting two rate cuts from the central bank this year. The first rate cut is anticipated to take effect in June or July, with an additional move later in the year.

As for the USD, the decision to hold rates sparked a modest rebound in the currency, but it was nothing to write home about and was quickly faded. The Fed's ‘no rush’ stance provides near-term support for the USD, but its trajectory will ultimately be determined by incoming employment and inflation data.

If we see both jobs and inflation numbers materially deteriorate, then we can expect the USD to continue pressing lower. However, elevated inflation along with stabilising jobs data may cause the Fed to postpone easing, a scenario that would underpin the USD.