The US Fed yesterday left the policy rate at 3.5%-3.75%
Markets
The US Fed yesterday left the policy rate at 3.5%-3.75%, pausing the normalization cycle that (re)started last year and lasted three rate cuts through December. Miran (Trump’s pick) and Waller (Fed chair contender) opted for a 25 bps cut. Reasons for the status quo are straightforward. The economic outlook “has clearly improved since the last meeting” and that has implications for the labour market. Downside risks to the latter, while still out there, have eased and there were signs of stabilization in the unemployment rate. That led the FOMC to drop related language in the statement. Inflation remains somewhat elevated but most of the overshoot is due to tariffs on goods. This is expected to be a one-off while disinflation in the services category is ongoing. Chair Powell added that upside inflation risks were generally lower as well without calling the balance (between inflation and the labour market) even just yet. Asked about possibility of a further cut, Powell stuck to the usual: they are well positioned and make decisions meeting by meeting, depending on the data. The takeaway is that the Fed under its current chair (until May) is done with easing unless data suddenly dictates otherwise. There were of course multiple non-monetary policy related elephants in the room. Why was Powell at governor Cook’s hearing? It would be hard to explain why he didn’t attend “the most important legal case in the central bank’s 113-year history”. Powell had five buzz killing words to block off the other high-profile topics, from the Fed subpoenas, his video statement, him staying as governor after his chair term ends, his successor or the recent dollar weakening. “I have nothing for you.”
The FOMC meeting went by unnoticed. US money markets were already positioned for an unchanged policy rate at least through June. It resulted in negligible net daily changes on the US yield curve. Bunds outperformed, especially on the front end of the curve. The recent euro appreciation/dollar depreciation caused the first ECB policymakers (Kocher, Villeroy) to warn on its potential impact on the inflation outlook – and therefore monetary policy. Rates fell up to 3 bps (2-yr). On that currency front, USTS Bessent talked up the dollar yesterday. He said the US has always had a strong dollar policy and that the US is “absolutely not” intervening in dollar-yen. USD/JPY shot up to 153.41, EUR/USD fell back below 1.20 and DXY rebounded from 96. But it doesn’t look like a strong basis for further USD-gains with the dollar recovery already running in reverse at the Asian dealings this morning. The greenback remains at the center of attention – and with it metal/commodity prices – today. Gold, silver, copper continue a breakneck rally. Brent nears $70 on increasing Trump threats to attack Iran. Markets approved earnings from big tech including Tesla and Meta Platforms yesterday, but gave a thumbs down to Microsoft. Caterpillar and Apple are among the high-profile companies on tap today. The economic calendar otherwise is of secondary importance.
News and views
The Bank of Canada (BoC) left its policy rate unchanged yesterday at 2.25%. It remains appropriate, conditional on the economy evolving broadly in line with the updated outlook. Canadian money markets err on the side of a rate hike as a next move by year-end (30% probability). Although the outlook barely changed from October, it is more vulnerable to unpredictable US trade policies and geopolitical risks. Economic growth is projected to be modest in the near term (2%-ish) as population growth slows and Canada adjusts to US protectionism. Inflation was 2.1% in 2025 and the BoC expects inflation to stay close to, but above, the 2% target over the projection period, with trade-related cost pressures offset by excess supply. The Loonie continues strengthening against an overall weak USD with rising commodity prices coming in handy. The 100% tariff treat from the US on the trade agreement with China so far doesn’t impress the currency. USD/CAD falls below the 2025 low at 1.3540 this morning.
Czech National Bank (CNB) board member Prochazka is inclined to hold the 3.5% policy rate for some more time, waiting for the additional data and the right moment to explain the market that one more rate cut is appropriate. At the moment, he still thinks that the CNB is in a good position because of sticky core inflation. Prochazka’s comments contrasts with a more dovish view held by his colleague Frait earlier this week who was still out on next week’s decision and saw room for two more rate cuts by the end of 2026. The front end of the Czech curve remains nevertheless under downward pressure going into next week’s CNB meeting, including an updated quarterly policy report. The Czech koruna profited less than for example HUF or PLN the past days as the dollar sold off globally. EUR/CZK holds steady between roughly 24.10 and 24.40 since the start of Q4 2025.
Author
KBC Market Research Desk
KBC Bank
