As was widely expected, the U.S. Federal Reserve held interest rates at current levels following the conclusion of its latest policy meeting.
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The Federal Reserve kept its trendsetting Fed Funds Rate in its current target range of 4.25% to 4.50%. Futures traders had anticipated that the U.S. central bank would stand pat on rates, with the stock market having already priced in the decision.
However, in its statement announcing the decision to hold interest rates at current levels, the Fed warned that inflation in America remains “somewhat elevated.” Inflation in the U.S. is currently at an annualized rate of 2.9%, down from a peak of 9.1% in June 2022, but still above the central bank’s 2% target.
Earlier on the same day, the Bank of Canada elected to lower interest rates by 25-basis points, putting America’s northern neighbor on a divergent monetary policy path.
A Strong Economy
The latest pause by the Fed comes after the central bank lowered interest rates three consecutive times, totaling a full percentage point, in the final months of 2024. The rate pause also comes with the U.S. economy remaining strong and resilient. In the third quarter of last year, the U.S. economy expanded at a 3.1% annualized pace, accelerating from the previous second quarter.
Lindsay Rosner, head of fixed income investing at Goldman Sachs (GS) said the Federal Reserve has hit the “pause button” on interest rates and entered a new wait-and-see mode on inflation. Futures traders immediately adjusted their expectations for further rate reductions this year.
The CME FedWatch tool showed that markets are now pricing in a 12% likelihood for no rate cuts this year, and a 31% chance of only one cut. Both of those numbers are higher than they were earlier in the day on Jan. 29.
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