Fin-X Rapid Response - January 29th

The FOMC kept the policy settings on hold today as expected, but with two members dissenting in favour of a cut. During the press conference, Chair Powell batted away political questions and focused on the outlook, commenting that upside risks to inflation and downside risks to employment appear to have diminished, likely setting up several months of stable rates.

• The FOMC held the Fed Funds policy rate at 3.50%-3.75% today, as widely anticipated.

• Governor Chris Waller, a candidate to replace Jerome Powell as Fed Chair, and recent White House appointee Stephen Miran dissented, preferring a quarter-point cut.

• The official statement said, "Available indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained low, and the unemployment rate has shown some signs of stabilization. Inflation remains somewhat elevated."

• Key points from the press conference included:

  • The outlook has improved since the December meeting. Solid growth is expected to carry into 2026 as some of the activity delayed by the Q4 shutdown is pushed into Q1.

  • Despite low job employment growth, unemployment appears to be stabilising at a low rate as the growth of the labour force is also very low due to slowing immigration and participation.

  • December +2.9% annual PCE inflation is seen as a result of tariff inflation in the goods sectors. In contrast, services are experiencing disinflation and "most" measures of longer-term inflation are consistent with the 2% target.

  • The Fed expects it will take some time for tariff effects to fully pass through before inflation then begins to return to 2%.

  • -0.75% of cuts since last September have likely brought the policy rate to the upper range of estimates of the neutral policy rate.

  • The neutral stance should allow the labour market to stabilise while allowing inflation to return to target.

  • Chair Powell declined to comment on recent US dollar weakness.

• S&P500 6,978 (unch), Nasdaq Comp. 23,857 +0.2%, S&P/ASX200 future 8,893 (unch),

• US 2yr 3.56% (unch), US 10yr 4.24% (unch)

• US dollar (DXY) index 96.37 +0.2%, AUDUSD 0.7042 +0.4%, Gold US$/oz 5,417 +4.6%

Fin-X Wealth View

• Powell's speech indicated that the FOMC needed to be patient regarding tariffs, suggesting that rates will remain on hold at least over the next two meetings, his last as chair.

• However, the risks to rates are not symmetric. Chair Powell said that no one saw a rate rise as the base case, and the next move is expected to be a cut. The first quarter-point cut is 75% priced in for the next chair's first meeting in June, with only two cuts priced in over the next two years.

• Despite the apparent stability, forces are still in tension below the surface. Conference Board Consumer Confidence (84.5) fell to the lowest level since 2014 in January. Chair Powell commented that stock market and housing gains were likely supporting consumer spending from wealthier households (positive wealth effects) while lower-income households continue to struggle with affordability, hence the need to focus on returning inflation to the 2% target.

• Despite the short-term improvement in the economy, concerns are building that the positive wealth effects rely on only handful of AI-linked megacaps and a relatively fragile housing market.

• At the same time, the ability of the administration to generate headlines so far in 2026 suggests that rate projections likely understate future volatility.

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