FOMC holds rates steady, emphasizes patience

The FOMC has recently been under a lot of pressure by the Trump administration to cut rates, but Chair Powell continued to highlight the importance of the Fed independence to the American public. Chair Powell reiterated the committee’s focus on its dual mandate of maximum employment and price stability, noting that inflation has eased significantly from its 2022 highs, while labor market conditions have shown signs of stabilization. He highlighted that consumer spending remains resilient and that the outlook for economic activity has improved meaningfully since the last meeting. Chair Powell also emphasized that the past three meetings have delivered a cumulative total of 75 basis points in rate cuts, and that holding policy steady at this meeting allows time to assess how those changes continue to work through the economy.

Impact on rates

Interest rates moved modestly higher following the decision, with yields rising roughly 1 to 2 basis points across the curve. The market reaction appeared driven by the Fed’s characterization of economic conditions as broadly resilient, rather than meaningfully deteriorating. Chair Powell also noted that upside risks to inflation and downside risks to the labor market have both diminished. Inflation pressures tied to tariffs were discussed, with Chair Powell indicating that much of the increase in goods prices reflects one-time effects rather than a persistent source of inflation. As a result, the Fed expects tariff-related price pressures to fade and largely drop out of the inflation data by mid-2026. Importantly for rate markets, Chair Powell made it clear that a rate hike is not part of anybody’s base case. Instead, the current stance reflects a desire to balance progress on inflation with emerging signs of labor market normalization, reinforcing a patient approach to future policy adjustments.

Moving forward

Looking ahead, the Federal Reserve emphasized that future policy decisions will remain dependent on incoming data. Chair Powell highlighted inflation trends, labor market conditions, and consumer activity as the key factors guiding the outlook. While recent data suggest economic momentum has improved, the Committee stressed that policy is not on a preset path and that decisions will be made meeting by meeting.

Market pricing reflects this patient stance. SOFR markets are currently pricing an 88% probability that the Fed holds rates at the March 18 meeting, with expectations centered on no near-term policy change. Beyond March, the market is pricing in approximately two rate cuts over the course of 2026, suggesting investors see further easing as gradual rather than imminent.

The Fed also addressed several sources of uncertainty. The FOMC expects the economic effects of the recent government shutdown to be short-lived and not materially alter the broader outlook. Finally, the Committee reaffirmed the importance of Federal Reserve independence, emphasizing its role in serving the public in an objective and unbiased manner. Overall, the message from this meeting was one of patience: with inflation easing and labor markets stabilizing, the Fed appears comfortable holding rates steady while awaiting clearer signals on the appropriate timing and extent of future policy adjustments.