Fed Holds Rates Steady, Powell Signals Patience on Cuts
Federal Reserve keeps benchmark rate at 3.5%-3.75% as expected. Markets await Powell's press conference for signals on 2026 rate path.
The Federal Reserve held interest rates steady Wednesday, keeping the federal funds rate at 3.5%-3.75% as universally expected. The decision continues the pause that began after December's cut.
Fed Chair Jerome Powell's 2:30 PM press conference will determine whether this meeting matters to markets.
What the Fed Did
The FOMC voted to maintain the current rate range, citing solid economic growth and a labor market that remains "relatively strong." Inflation has moderated but stays above the Fed's 2% target.
The statement acknowledged "some further progress" on inflation while noting the economy has remained "resilient." No surprises there—the Fed telegraphed this hold weeks ago.
This pause follows three consecutive 25-basis-point cuts in September, October, and December 2025 that brought rates from their 4.25%-4.50% peak to current levels. The cumulative 75 basis points of easing provided relief but didn't signal aggressive accommodation.
What Markets Want to Hear
Traders are positioned for one or two additional cuts in 2026, most likely in June and December based on CME FedWatch pricing. The question for Powell: does that timeline still hold?
Several variables have shifted since December:
The labor market has cooled more than expected. December's jobs report showed the weakest hiring of any year since 2020. Unemployment remains low, but momentum has clearly faded.
Inflation readings have been mixed. Core PCE has trended lower, but the path toward 2% isn't smooth. The Fed's preferred measure still runs above target.
Fiscal policy uncertainty has grown. The Trump administration's tariff proposals, spending plans, and regulatory changes add unpredictability to the economic outlook. The Fed typically prefers to observe fiscal policy effects before reacting.
And then there's the political backdrop. President Trump has publicly pressed for lower rates. Powell will need to thread the needle—appearing responsive to economic data without seeming to bend to political pressure.
The DOJ Investigation Cloud
This meeting comes amid an unusual distraction: the Justice Department has subpoenaed the Fed as part of a criminal investigation into testimony Powell gave last June about a $2.5 billion building renovation.
It's the first time a sitting Fed chair has been investigated by the DOJ. Powell will likely deflect questions about the probe, but its existence adds an awkward dimension to the press conference.
The investigation doesn't change monetary policy, but it may affect how Powell communicates. A chair under legal scrutiny might be even more careful with words—potentially offering less forward guidance than markets would prefer.
The S&P 500 Setup
Stocks approached the press conference near record highs. The S&P 500 closed Tuesday at 6,978.60, a fresh all-time record. Futures ticked higher Wednesday morning.
Markets have largely priced in a patient Fed. Any hint of accelerated cuts would be bullish; any suggestion that rate cuts are further away than June would pressure equities.
The volatility surface shows traders pricing limited movement off the decision itself but meaningful uncertainty around the press conference. VIX options activity suggests positioning for post-Powell swings in either direction.
What to Watch in the Statement
Beyond rate guidance, several elements merit attention:
The Fed's characterization of the labor market will signal whether the weak December payrolls number has altered their view.
Any changes to inflation language could hint at confidence (or lack thereof) in the disinflation trajectory.
Discussion of "risks" to the outlook may reference fiscal policy uncertainty without explicitly naming tariffs or spending proposals.
The December FOMC meeting revealed divisions among policymakers about the appropriate pace of cuts. Wednesday's statement may indicate whether consensus has reformed around patience or whether doves are pushing for faster action.
For now, rates are on hold. Powell's words will determine whether the hold looks temporary or extended. Markets are listening.