DWS: Fed on hold, central bankers are playing for time

DWS: Fed on hold, central bankers are playing for time

30 januari 2025

Fed
Fed dollar (kreatikar, Pixabay)

By Christian Scherrmann, chief US economist at asset manager DWS

As expected, the Fed held rates steady at its January FOMC meeting. The small changes in the press statement, such as the removal of further progress on disinflation, were described by Fed Chair Jerome Powell in the press conference as a clean-up rather than a signal.

According to Powell, inflation has made significant progress, and the labor market is not currently contributing to upward price pressures. However, they are in no hurry to adjust monetary policy, there is no predetermined path and they are ready to react either way. Further rate cuts still require further progress on inflation or a sustained weakening of labor market conditions. For the time being, he continues to believe that monetary policy remains meaningfully restrictive and well-positioned. Regarding the potential impact of politics, he replied that they would need to see "articulated outcomes" before they could make judgments about the implications for monetary policy.

Central bankers seem to be playing for time. We have long expected that the last mile of disinflation would take time, and incoming data on inflation and labor markets already support a more gradual pace of easing. Political uncertainties over issues such as tariffs, spending and immigration, all of which have the potential to support higher prices, make an even more cautious and data-dependent approach reasonable. Central bankers are now in the position of waiting for further input from politics to calibrate monetary policy, which in turn limits forward guidance. Looking ahead, we expect inflation data to be supportive, at least in the first quarter. This keeps the door open for another cut in March and perhaps June, but of course the risk is currently tilted towards less easing rather than more. However, the Fed itself seems to be in a comfortable position to react either way, having already cut rates by 100 basis points. Nevertheless, we think the case for a rate hike remains rather unlikely at the moment.

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