The Federal Reserve kept policy unchanged at its January meeting, holding the Fed Funds Target Range at 3.50%–3.75%, exactly as markets had anticipated.

While the decision itself was uneventful, the message behind it was not.

This meeting marked a clear shift in tone: less about defending against downside risks, and more about acknowledging that the U.S. economy is standing on firmer ground than previously feared.

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Fed Statement: Risks Rebalanced, Growth Reassessed

The FOMC acknowledged that inflation remains somewhat elevated, but notably removed language suggesting rising downside risks to employment.

Key points from the statement:

• Economic activity is now described as expanding at a “solid” pace
• Job gains remain low, but the unemployment rate is stabilising
• Uncertainty around the outlook remains elevated, but risks are seen on both sides of the mandate, not skewed toward weakness

This subtle change matters. It signals that the Fed no longer sees the labour market as deteriorating — just cooling.

The decision passed with a 10–2 vote, with Governors Miran and Waller dissenting in favour of a 25 bps cut, underscoring that the debate has shifted from whether to hike to how long to wait before easing.

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Powell: Policy Is Appropriate, Not Restrictive

In his press conference, Chair Jerome Powell struck a measured, neutral tone, leaning slightly dovish without committing to a path forward.

Powell emphasised:

• The U.S. economy is on “firm footing”
• Current policy settings are appropriate for balancing inflation and employment goals
• It is difficult to characterise policy as significantly restrictive given recent data

Housing remains weak, but Powell expects the drag from the recent government shutdown to reverse this quarter. Consumer spending, meanwhile, continues to hold up better than expected.

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Labour Market: Cooling, Not Cracking

Powell acknowledged that the labour market has softened, but pushed back against recession-style narratives.

Key observations:

• Slower job growth reflects lower labour force growth and easing demand
• Indicators such as job availability suggest cooling, not collapse
• Powell suggested the labour market may be stabilising at lower momentum

Importantly, he was clear:
A rate hike is not anyone’s base case.

Future cuts, however, will depend on whether labour conditions weaken further — not on preset timelines.

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Inflation: Tariffs Still the Main Distortion

On inflation, Powell offered reassurance that markets have been looking for.

• Core PCE inflation for December is estimated around 3%
• Most of the overshoot is linked to tariff-driven goods prices
• Core inflation excluding tariffs is running just above 2%
• Services inflation continues to ease
• Tariff-related inflation is expected to peak mid-year, then fade

Powell described the retracement in short-term inflation expectations as “very comforting”, reinforcing confidence that longer-term inflation expectations remain anchored.

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Policy Outlook: Flexible, Data-Dependent, Patient

The Fed now sees policy rates as sitting within the upper range of neutral estimates. This framing is critical.

It tells markets:

• The Fed does not feel behind the curve
• There is no urgency to cut — but no resistance to cutting if conditions warrant
• Decisions will be made meeting by meeting

Powell summed it up clearly:
If the labour market weakens, cuts make sense.
If it holds, patience is justified.

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Why This Matters for Markets

This was not a turning-point meeting — it was a confirmation meeting.

The Fed is comfortable.
Inflation dynamics are improving.
Labour risks have stabilised.
Policy is flexible.

For traders, that means:

• Fewer policy shocks near term
• Greater sensitivity to labour and inflation data
• Volatility driven more by expectations shifts, not policy surprises

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What Traders Should Watch Next

The Fed is comfortable — but markets won’t stay still. Attention now shifts to confirmation, not policy headlines.

Key focus areas ahead:

• Labour Market Data
  Watch upcoming payrolls, job openings, and participation rates. The Fed’s confidence rests on stabilisation, not acceleration.
• Core Inflation Ex-Tariffs
  Markets will track whether services inflation continues to ease as Powell expects. Any reversal would challenge the “healthy disinflation” narrative.
• Yield Curve Behaviour
  Long-term yields will signal whether markets agree that policy is near neutral — or still restrictive.
• Housing & Credit Indicators
  Housing remains the weakest link. Further softness could reopen the easing debate faster than expected.
• Fed Communication Tone
  Any shift from “meeting-by-meeting” to clearer guidance would be a market-moving signal.

Bottom line:
This is a data-driven phase. Volatility will come from surprises, not decisions.

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