Federal Reserve rate decision: No change to interest rates, as expected

• Prior range was 4.25-4.50%
• The market was fully priced for no change
• recent indicators suggest that economic activity has continued to expand at a solid pace (no change to this)
• The unemployment rate remains low
• labor market conditions remain solid (no change to this)
• Inflation remains somewhat elevated (no change to this)
• Uncertainty about the economic outlook has diminished but remains elevated (previously said it had increased)
• The Committee is attentive to the risks to both sides of its dual mandate (no change to this)
• Fed ‘judges that the risks of higher unemployment and higher inflation have risen’
• No dissents

Key median projections:

• Dec 2025 Fed funds 3.9% vs 3.9% prior (though this was just by a single dot/vote)
• Dec 2026 Fed funds 3.6% vs 3.4% prior
• Dec 2027 Fed funds 3.0% vs 3.1% prior
• Dec unemployment 4.5% vs 4.4% prior
• Dec PCE inflation 3.0% vs 2.7% prior
• Core PCE 3.1% vs 2.8% prior
• 2025 GDP 1.4% vs 1.7% prior

USD/JPY was trading at 144.76 ahead of the release and the S&P 500 was up 20 points. Ten-year yields were at 4.37% and 2s at 3.94%.

The kneejer reaction was modestly dovish with USD/JPY initially falling then stabilizing at 144.66 with S&P 500 futures slipping 3 points and 2s trading at 3.91%.

The SEP shifted hawkishly but not as much as feared with the median still at 3.9% for year end. I think that’s the main thrust of the initial trade, though just one more dot would have shifted the median to a single cut.

I think the key line in the statement is around the higher risks on both sides of the mandate, which indicates some uncertainty and the risk of falling behind the curve. The market tends to think that the mistake will be not cutting early enough.

This article was written by Adam Button at www.forexlive.com.