INSTANT VIEW-Fed stands pat, leans hawkish with omission of inflation-progress reference

Jan 29 (Reuters) - The Federal Reserve left interest rates in the 4.25% to 4.50% target range on Wednesday and gave little insight into when further easing may take place in an economy where inflation remains above target, growth continues, and the unemployment rate is low.

After several months in which inflation data have largely moved sideways, the U.S. central bank dropped from its latest policy statement language saying that inflation "has made progress" towards the Fed's 2% inflation goal.

The Fed is now in a holding pattern as officials await further inflation and jobs data and clarity on the impact of President Donald Trump's policies.

MARKET REACTION:

STOCKS: The S&P 500 .SPX extended a loss to -0.79%

BONDS: The yield on benchmark U.S. 10-year notes US10YT=RR rose to 4.583%. The 2-year note US2YT=RR yield rose to 4.257%

FOREX: The dollar index =USD extended 0.25% higher, while the euro EUR= extended a loss to -0.35%

COMMENTS:

BRIAN JACOBSEN, CHIEF ECONOMIST, ANNEX WEALTH MANAGEMENT, MENOMONEE FALLS, WISCONSIN

"The Fed seems to think the economy is stuck with a low unemployment rate and elevated inflation. The statement could be read to be mildly hawkish, suggesting that a little jolt to rates could kick the economy out of this equilibrium."

MATTHIAS SCHEIBER, HEAD OF THE MULTI-ASSET SOLUTIONS TEAM, ALLSPRING GLOBAL INVESTMENTS, LONDON

"We think the likely window for any future rate reductions won’t open before May, and we expect the Federal Reserve (Fed) to cut twice this year.

"As the new administration starts implementing its fiscal policy plans, we expect the Fed will remain cautious in monitoring inflation. For 2025, the interest rate market currently expects the Fed to cut rates to somewhere around 4.00% by year-end. A lot will depend on how inflationary U.S. fiscal policy turns out to be.

"We continue to like equities—especially the cheaper parts of the U.S. equity market and parts of international markets that benefit from central bank cuts and weaker currencies. We expect the equity rally to broaden and believe that any relief from looser monetary policy would likely support equity prices in the medium term. The outlook for higher-yielding bonds remains favorable despite tighter spreads, as a U.S. recession looks unlikely."

MICHELE RANERI, HEAD OF U.S. RESEARCH AND CONSULTING, TRANSUNION, CHICAGO (by email)

“On the heels of a series of stronger than expected economic indicators the Federal Reserve forewent another interest rate reduction today, instead opting to hold firm for now. This represented the first meeting since July 2024 at which the FOMC has not lowered interest rates. It remains to be seen how many rate reductions will now take place over the course of 2025.

"While inflation concerns have significantly abated, they still remain. As a result, it is quite possible that there will be fewer rate cuts over the course of next year than anticipated only a few months ago. We will continue to monitor how previous rate cuts are working their way through the economic ecosystem. Consumers should continue to monitor their own credit scores and credit reports to make sure they are in the best possible position to act when rates do come down.”

MICHAEL BROWN, SENIOR RESEARCH STRATEGIST, PEPPERSTONE, LONDON

"I'm not sure (the Fed dropping reference to inflation 'progress' from policy statement) is a huge game-changer in all honesty, though it may be a subtle nod towards policymakers wanting to see further disinflationary progress back towards the 2% target before delivering another rate cut later in the year."

"The direction of travel for rates is clearly lower, however, with the timing of said cuts to depend on incoming data, seeing the Fed start this year pretty much where they left off in 2024."

LINDSAY ROSNER, HEAD OF MULTI SECTOR FIXED INCOME INVESTING, GOLDMAN SACHS ASSET MANAGEMENT, NEW YORK

“The New Year saw the Fed entering a ‘new phase’ of its easing cycle, with strong growth and resilient labor market data providing scope for a more patient approach amid elevated data and policy uncertainty. While we continue to think the Fed’s easing cycle has not yet run its course, the FOMC will want to see further progress in the inflation data to deliver the next rate cut highlighted by the fact they removed the reference on inflation making progress.”

JOSEPH SROKA, CHIEF INVESTMENT OFFICER, NOVAPOINT, ATLANTA

“The Fed was fully expected that rates would remain unchanged at the conclusion of today's policy meeting. I think that the Fed made that clear in their summary of economic projections after the December meeting that the pace of rate cuts was going to decelerate in 2025 and that certainly with the new administration coming in and its own fiscal and other policies it was bringing to the table that the Fed was in a good position now after 100 basis points of cuts to take a wait-and-see approach of how the data is going to evolve over the first three or four months of the new administration before they'd have to make hard decisions again on interest rates.”

“People are going to position trades for the announcement. It's not uncommon to see the market rally and then decline or decline and then rally, and we're only 5 minutes past the announcement. So, I think the information needs to work itself through to market participants.”

“The bigger issue is I don't think anyone was looking for a rate cut today, and we can debate now over the next couple weeks what we think the next point of direction is going to be.”

“I think the press conference is going be a circus today because I think a lot of people are going to want to know about the relationship between Trump and Powell and how Powell feels about Trump coming back into the administration. Does it jeopardize the independence of the Fed?”

JAMIE COX, MANAGING PARTNER, HARRIS FINANCIAL GROUP IN RICHMOND

“The Fed just told us no March rate cut, so all eyes are on May. The removal of the inflation language is leading some market participants to conclude that the Fed is changing its rate bias from lower to higher—I don’t share that view.

“I believe the Fed removed the language to keep markets from fixating on the trajectory of inflation and instead focus on economic growth and unemployment, both of which are in a really good place.”

MARK LUSCHINI, CHIEF INVESTMENT STRATEGIST, JANNEY MONTGOMERY SCOTT, PITTSBURGH, PA

"There was no surprise in the fact that rates remained unchanged. However, the removal of the line associated with inflation making progress ... acknowledges that inflation remains above the Fed's target and may be leveling off above the target rate."

"The FOMC recognizes that the inflation level remains elevated and the market's interpretation of that, at least so far, seems to be that it was a bit of a hawkish undertone."

"What investors will be focused on is Jay Powell's comments during the press conference. It may ease some of those concerns or reinforce them."

GUY LEBAS, CHIEF FIXED INCOME STRATEGIST, JANNEY MONTGOMERY SCOTT (by email)

“After 3 cuts totaling 100 basis points it is clear that the Fed has downshifted to a slower pace of rate reductions. While the direction of travel remains towards cuts, the speed of that travel has decelerated. Persistently strong economic growth and a few *slightly* elevated inflation readings in 4Q are to blame. For now, what a slower speed means is a “skip” at the Jan FOMC meeting followed by, likely, another cut in March as 1Q inflation readings come in closer to the 2% pace. That’s far from certain and depends on hard-to-predict short term data cooperating, but a March cut is the most likely outcome in our view.”