Fed Holds Rates Steady: Uncertainty is the Only Certainty
The Federal Reserve (Fed) held rates steady amid an uncertain economic backdrop and questions surrounding both sides of its dual mandate of maximum employment and price stability.
Key takeaways
- Market expectations have been volatile, with two hikes priced by March 2027 and continued weakness in U.S. Treasuries.
- Inflation is likely to remain stubborn, absent a slowdown in growth, and is expected to stay above target in the near term.
- Forward guidance has historically suppressed bond market volatility.
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.
Common questions about the Fed, the FOMC, and interest rates
- What is the FOMC, and why do its meetings matter to investors?
The Federal Open Market Committee (FOMC) is the group within the Federal Reserve (Fed) that sets U.S. monetary policy. Its decisions influence interest rates, borrowing costs, inflation, and economic growth. For investors, these decisions often trigger price reactions across stocks, bonds, currencies, and commodities, sometimes immediately after announcements.
- What is the federal funds rate, and how does it affect me as an investor?
The federal funds rate is the interest rate banks charge each other for overnight loans. While retail investors don’t borrow at this rate directly, it influences mortgage rates, credit cards, savings yields, and business loans. Changes in the federal funds rate can affect corporate profits, stock valuations, and bond prices, making it a key input for investment decisions.
- How often does the FOMC meet, and when are rate decisions announced?
The FOMC typically meets eight times per year, about every six weeks. Interest rate decisions are announced at the conclusion of each meeting, along with a policy statement, a press conference (most meetings), and economic projections (certain meetings). Markets often react within minutes of each announcement.
- Why do markets sometimes fall even when the Fed does what investors “expected”?
Markets trade on expectations, not just decisions. Even if the Fed’s rate move is widely anticipated, stocks can still fall in price for a few reasons. First, the Fed’s language may sound more aggressive (hawkish) than expected. Second, future rate projections may be higher than what markets had priced in. Third, the chair’s press conference may signal increased concern about inflation or economic growth. In any of these cases, guidance about the future often matters more than the current rate change.
- How do interest rate hikes or cuts generally affect stocks and bonds?
Interest rate hikes tend to be a pressure on growth stocks, increase bond yields while lowering existing bond prices, and strengthen the U.S. dollar. Interest rate cuts tend to support stocks and risk assets, boost bond prices, and lower borrowing costs across the economy. The actual market impact depends on why the Fed is changing rates (e.g., inflation versus recession risk).
- Should long‑term investors change their strategy based on FOMC decisions?
For most long‑term retail investors, frequent trading around Fed meetings isn’t necessary. FOMC decisions can drive short‑term volatility, but long‑term returns are typically driven by earnings growth, valuations, and staying invested in the market. Many investors use Fed signals to rebalance risk, adjust bond duration, or reassess exposure to rate‑sensitive sectors rather than to make sweeping investment changes.
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