Fed Holds Rates Steady: Uncertainty is the Only Certainty

Federal funds rate stays at 3.50–3.75%

The Federal Open Market Committee (FOMC) held the federal funds rate steady at 3.50–3.75%, a decision that was widely expected by markets. While policy remains on hold, the FOMC continues to face a challenging balancing act between bringing inflation back to target levels and supporting economic activity.

Since the previous meeting, inflation data have generally surprised to the downside, with weakness evident across a range of components, including transport and communication services. This has supported expectations that underlying inflationary pressures are gradually easing. The shift in geopolitical risk remains a key consideration and, while neither central bankers nor markets possess perfect foresight, the FOMC is likely to look through any near-term, supply-driven inflation pressures as transitory. Nevertheless, policymakers have remained reluctant to signal that the inflation fight is over, emphasizing the need for greater confidence that price stability is being restored sustainably.

The FOMC continues to characterize policy as appropriate and appears comfortable remaining patient while assessing incoming data. That said, policymakers are likely to retain a degree of caution given that inflation remains above target and supply-side risks persist, as reflected by the three dissenting votes advocating for a 0.25% hike. By providing less certainty around the future policy path, investors may increasingly rely on incoming economic data to infer how the Fed will react. 

A new communications framework

Markets continue to adjust to Fed Chair Warsh's approach to communication. Unlike previous Fed leadership teams, the current FOMC has placed less emphasis on providing explicit forward guidance and greater emphasis on responding to evolving economic conditions. Investors may look to the Jackson Hole symposium for further insight into how monetary policy will be communicated under Fed Chair Warsh's leadership.

As mentioned, market participants are likely to place increased weight on economic releases and official commentary when assessing the future policy path. We believe this may contribute to greater volatility in market expectations as investors reassess the balance between inflation and growth risks and underappreciated volatility in fixed income markets.

Opportunities abound

Looking ahead, the outlook remains complicated. Inflation expectations have been volatile, but a combination of elevated real yields and ongoing geopolitical uncertainty suggests that market volatility is likely to persist. Commodity markets continue to face supply-side pressures, while tariff uncertainty adds another layer of complexity to the consumption outlook. Earnings expectations for equities remain robust despite the large move in yields over the past year.

Against this backdrop, we have maintained a cautious stance toward longer-duration U.S. government bonds. While yields may remain volatile, we believe investors may have opportunities to selectively take advantage of further yield increases, where appropriate. 

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Duration is a measurement of the sensitivity of a bond’s price to changes in Treasury yields. A fund’s duration is the weighted average of duration of the bonds in the portfolio. Duration should be interpreted as the approximate change in a bond’s (or fund’s) price for a 100-basis-point change in Treasury yields. Duration is based on historical performance and does not represent future results.

The Consumer Price Index is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. You cannot invest directly in an index.

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