The Federal Open Market Committee meeting on 29th January went as expected widely by market participants, with the Federal Reserve keeping interest rates unchanged for a range of 4.25%-4.50%. In the three meetings prior to this, interest rates were cut by a total of 100 basis points. At the current moment, Fed Fund Futures suggest the probability of about 2 interest rate cuts by the end of 2025, down from about the 4 cuts expected in 2024.
Fed Chair Jerome Powell suggested that officials were not in a rush to lower interest rates, given a robust US economy along with solid labor market conditions. He cited the need to see further progress on inflation as it remained somewhat elevated before adjusting rates again. By allowing policy to stay the same, the Fed can wait for further evidence of cooling inflation, especially in an uncertain scenario with Donald Trump’s policies on immigration, tariffs and taxes. Fed officials indicated that the risks to inflation and employment goals remain “roughly in balance” and the “extent and timing” of future adjustments to interest rates will depend on economic data and outlook. Despite Trump’s push for lower interest rates, the Fed, being an independent agency, would undertake policy decisions depending on prevailing market conditions and economic data. The US is scheduled to release its Q4 GDP figures today, while the Fed’s preferred inflation gauge, the core PCE price index data, is expected to be released tomorrow, providing insights for the Fed to make further policy decisions.
The Fed’s decision came in during increasing uncertainty about inflation’s outlook for the upcoming year. Some signs, like the US core CPI rising 0.2%, which was less than consensus expectations, helped to restart conversations of a rate cut, while Trump’s tariff threats triggering a trade war added to expected inflationary pressures. In reaction to the Fed’s decision, the 10-year treasury bond yield briefly rose to 4.58% before retreating to 4.53% during Powell’s press conference.
Following the announcement, the Central Bank of UAE decided to maintain the Base Rate applicable to the Overnight Deposit Facility (ODF) at 4.40%, shadowing the Fed’s move. The benchmark interest rate is anchored to the US Fed’s IORB and signals the general stance of monetary policy in both countries. This was an expected move as most GCC currencies, like the AED, are pegged to the US dollar.
