For a fourth consecutive meeting, the US Federal Reserve’s policy committee held benchmark borrowing costs at a 23-year high, and signalled a desire to keep rates at prevailing levels for now. In a distinctly non-committal statement, the Federal Open Market Committee said it “judges that the risks to achieving its employment and inflation goals are moving into better balance,” but avoided telegraphing imminent cuts, warning that it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent”.

Language that previously referred to the possibility of “additional policy firming”, was dropped, replaced with a more neutral sentence noting that the central bank is “prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals”. This was less aggressively accommodative than many market participants had hoped, but is consistent with a Fed that remains unwilling to commit to a timetable for easing policy.

Ahead of the decision, markets were assigning near-55-percent odds to a rate cut at the central bank’s March meeting, but those odds are now slipping, providing some lift to the dollar and Treasury yields.

With no new economic forecasts or rate projections to muddy the message, Chair Jerome Powell’s words during the post-decision press conference will be tightly scrutinized for guidance on the pace and scale of monetary policy easing through the year. Following 11 increases between March 2022 and July 2023, the target range for the federal funds rate has remained between 5.25 and 5.5 percent, with real rates – nominal policy rates adjusted for the pace of underlying price growth – rising in line with declining inflation. If Powell chooses to follow policy orthodoxy, hints of a shift onto a more accommodative footing should become fairly clear.

Midpoint Fed Funds Target Rate, %

Of course, the decision comes after a raft of factors contributed to a decline in yields. Data released this morning showed ADP’s gauge of private sector employment climbing by less than expected in January, putting downward pressure on expectations ahead of Friday’s non-farm payrolls report. The Fed’s preferred measure of wage pressures – the employment cost index – cooled by more than expected in the fourth quarter. And the major move came after New York Community Bank (buyer of crypto-focussed Signature Bank last year) said it had lost $260 million in the fourth quarter, forcing it to cut dividends by 70 percent to meet regulatory requirements.

If investors are bracing for a re-run of last year’s banking crisis, we suspect this reaction is overwrought. But if markets are preparing for a long-expected wave of commercial property-related losses, the move lower could be sustained. The Federal Reserve’s policy stance could be set for a rude shake-up.