Trends & Tides – US FOMC January 2025
The US Federal Open Market Committee (FOMC) keeps the Federal Funds Rate steady at 4.25%-4.50% in the January 2025 meeting. In the post-policy press conference, Federal Reserve Chair Jerome Powell stated that the Fed is not rushing to lower interest rates, even though they are ‘meaningfully above’ the long-term neutral rate.
The US economic momentum remains strong, with recent economic data aligning with or surpassing market expectations. The 2025 GDP forecast has been revised upwards from 1.7% in September 2024 to 2.2% in January 2025. The Trump administration is expected to pursue pro-growth economic policies, such as lower tax rates and a greater focus on domestic manufacturing. The FOMC statement also notes that economic activity has continued to expand at a solid pace.
Recent data indicates that the decline in US inflation has stalled. The US CPI inflation rose for the third consecutive month in December 2024 to 2.9% YoY from 2.7% YoY in the previous month. However, the core CPI, which excludes food and energy, eased to 3.2% in December 2024, down from 3.3% over the previous three months. The 5-year breakeven inflation rate, which reflects expected inflation over the next five years on average, has increased significantly since September 2024. The FOMC statement notes that inflation remains ‘somewhat elevated’ and removes the reference to ‘progress toward the 2% objective.
The US labor market also remains resilient. The US unemployment rate decreased to 4.1% in December 2024 from 4.2% in the previous month. The non-farm payroll additions also remain robust. The FOMC statement notes that the unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid.
Yields have risen as markets have significantly reduced their expectations for policy easing. The new administration’s inflationary policies are expected to decelerate monetary policy easing and potentially increase the terminal Fed funds rate. At present, markets anticipate further rate cuts of 25-50 bps by the end of 2025.
