FOMC likely to hold rates for longer after hawkish pause in Jan, analysts say

Investing.com-- Wall Street futures saw volatile trade on Wednesday evening after the Federal Reserve kept interest rates on hold as widely expected while downplaying expectations for future rate cuts and presenting a hawkish stance. 

U.S. stock indexes had reacted negatively to the Fed’s move, closing lower on Wednesday on the prospect of rates remaining relatively high for longer. Comments from Fed Chair Jerome Powell added to this notion, although he few direct cues on future easing. 

Analysts were of the consensus that the Fed’s hold heralded an extended pause in easing, especially amid caution over inflationary policies under President Donald Trump.

Trump said that Powell and the Fed had “failed to stop the problem they had created with inflation,” and that he would help bring price pressures down. 

BofA analysts said the FOMC statement was “slightly hawkish,” but Powell’s comments were mixed, given that the Fed chair still signaled that rates remained above neutral. 

But they noted that the Fed’s comments signaled that there would be no immediate reductions in interest rates. 

“We remain comfortable with our call that the cutting cycle is over. The fact that March does not appear to be Powell’s base case supports our view, since the Fed rarely moves at slower than a quarterly cadence in either direction,” BofA analysts wrote in a note. 

Deutsche Bank (ETR:DBKGn) analysts also saw Powell’s comments suggesting that a March cut was unlikely, given his emphasis on the underlying strength in the U.S. economy and labor market. 

DB said the Fed also likely signaled a wait-and-see approach in the face of policy uncertainty over Trump, who has promised sweeping fiscal changes and a more protectionist stance on immigration and trade. 

DB said Wednesday’s meeting furthered the notion that January’s hold will turn into an “extended pause.” 

Standard Chartered (OTC:SCBFF) analysts said the Fed’s Powell was straddling a “fine line” between concerns over potentially inflationary policies under Trump and sparking a political battle by pre-emptively altering policy by “prejudging likely Trump policies and their economic impacts.” 

The Fed cut rates by a total of 1% through 2024, citing some progress in bringing down inflation. But recent stickiness in inflation saw the bank signal in December that it will cut rates at a substantially slower pace in 2025. 

Powell had also repeatedly expressed uncertainty over policy changes under the Trump administration.

Trump has vowed to shore up economic growth, cut corporate tax rates, and adopt a hardline stance on trade tariffs and immigration- all factors that could underpin inflation in the coming years.