PIMCO: Fed interest rate pause continues for now, outlook highly uncertain

PIMCO: Fed interest rate pause continues for now, outlook highly uncertain

30 januari 2025

Fed
Federal Reserve Washington.png

By Allison Boxer, Economist at PIMCO

The Federal Reserve reiterated its focus on a patient, data-driven path at its January meeting when it held its policy rate steady at 4.25%–4.5%. This decision followed three straight meetings at which the Fed cut its rate. Elevated uncertainty about the outlook for U.S. fiscal and trade policy, alongside recent data showing solid growth and labor market stability, made it easy for the Fed to leave rates unchanged and signal that there is no hurry to adjust rates again.

In the press conference, Fed Chair Jerome Powell essentially set the stage for the Fed to remain on pause while officials wait for more data. We believe Powell’s comments likely indicate another pause in March, absent data or policy surprises. But looking further ahead, Powell suggested the Fed remains on track to keep easing, consistent with our expectations for the Fed to cut rates somewhat further this year.

Data and signals

The message Powell emphasized was that monetary policy is in a good place, and the Fed is well-positioned to react to incoming data. We believe this message reflects developments since the Fed’s prior meeting in mid-December, when the central bank signaled a slower pace of rate cuts in 2025; the U.S. economy was resilient in the fourth quarter, and the labor market still looks solid. Although Powell expressed optimism about the past two months of inflation data showing signs of further progress, 100 bps of rate cuts since September and a solid U.S. labor market give Fed officials the flexibility to wait for inflation to moderate further.

A rate cut at the March meeting would likely require incoming inflation and labor market reports to be softer than Fed officials are expecting. Barring those surprises, rates are likely to remain on hold for now.

That said, we believe Powell’s comments indicate the Fed still expects to cut rates this year. He noted that officials expect to see further progress on inflation, and that policy is still “meaningfully above” the neutral policy rate that they expect to reach over time. Moreover, we thought he continued to keep rate hikes off the table, noting that if inflation remains stickier than expected, the Fed is well-positioned to simply keep rates on hold in restrictive territory.

Market pricing and investment takeaways

We continue to expect the Fed to ease rates modestly further in 2025, following the 100 bps of easing last year, but the timing and size of rate cuts are more uncertain. Following the meeting, futures markets implied the policy rate will end 2025 about 45 bps lower, a level consistent with Fed officials’ median dots (projections) shared at the December meeting. Against the backdrop of elevated uncertainty, intermediate-maturity bond yields look attractive relative to our long-term 0%–1% neutral real interest rate baseline. Today’s starting yields also compare favorably against the equity markets, where valuations are notably high.

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