NEWS AND INSIGHTS | INSIGHTS

CIO Notebook: Fed Holds Rates Steady as Powell Promotes Patience

January 30, 2025
Shannon Saccocia, CFA, Chief Investment Officer—Private Wealth

We are positioned for a broadening of the equity markets based on a confluence of factors including robust U.S. growth, strong labor demand, and deregulation – all of which are unlikely to be upset by a patient Fed or a new AI entrant

As expected, the Fed held rates steady in their first meeting of the year, maintaining the fed funds at a target range of 4.25% to 4.50%. The decision was unanimous and follows on rate cuts totaling 1.00% over the previous three meetings. While the decision may have been anticipated, there were changes to the statement which had investors on edge prior to the press conference. Specifically, the statement noted that “the unemployment rate has stabilized at a low level” and that “labor market conditions remain solid” – both a nod towards the improvement in employment data following last summer’s surprise and an acknowledgment that the Fed feels is delivering on its employment mandate. More inflammatory, perhaps, was the removal of “made progress” when describing inflation, which is now cited as “somewhat elevated.”

While equities and long bonds sold off initially on the release, Fed Chair Jerome Powell once again used the press conference to temper the perception that the Fed is leaning more hawkish as a result of potential policy moves; instead, he amplified the strength of the economy, the lack of upward wage pressure, and the stabilization of the housing market as justification for patience in moving rates lower. In addition, Powell stated that policy is “meaningfully less restrictive” than it was last summer, but that it is important for “policy to be restrictive enough” in order to counteract any price pressures. Perhaps most telling was Powell’s reticence to opine on any of the Trump Administration’s proposed economic policies, instead continuing to refer back to the Fed’s dual mandate and the balance the FOMC believes is in place at this point in time.

The meeting follows an eventful ten days as President Donald Trump assumed office for his second term and investors and policymakers alike got their first look at where the new administration might focus its near-term efforts. Trump’s video comments last Thursday to the World Economic Forum in Davos, Switzerland indicated that he would like to see the Fed lower interest rates, but the underlying economic momentum and the potential for incrementally higher inflation on the back of new tariffs coupled with stable unemployment provide ample rationale for today’s pause.

In addition, investors are digesting the quick whipsaw for AI stocks, which soared last week following the last week’s Project Stargate announcement and its $500 billion price tag, only to fall sharply on Monday as questions swirled around the potential for AI costs to be meaningfully lower following the unveiling of DeepSeek’s R1 model. (Our take: As painful as some of the individual stock declines were, the potential for a new breed of more-affordable, open-source models, allowing for additional innovation and productivity enhancement to come to market, could represent a meaningful and broader benefit over time.)

As we look out further, we believe that the Fed will resume rate cuts in the coming months, likely by mid-summer – although there will be a lot of chatter on the timing ahead of that, particularly if short-term disruptions pressure core CPI higher. Our assumption, however, is that inflation will continue on a downward path, resulting in two cuts in 2025. Conversely, we believe a hike is highly unlikely, and therefore are constructive on the opportunities in fixed income, particularly in investment grade. In addition, we have been positioned for much of the last year for a broadening of the equity markets and have even greater confidence going into 2025 based on a confluence of factors, including but not limited to robust U.S. growth, strong labor demand, and deregulation – all of which are unlikely to be upset by a patient Fed or a new AI entrant.

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