• No surprise: no cut, range stays at 3.5% to 3.75%.
• “Wait and see” — no guidance on more cuts.
• Upgraded economy from “moderate” to “solid.”
• Removed: concern about employment

In the dark

The Federal Reserve Open Market Committee hit the pause button on rate cuts again today. Quick review: After the virus shutdowns, the FOMC raised its overnight Fed Funds range from 0.25% to 5.5% in 11 steps. That hiking cycle ended in July 2023. The Fed held rates there until September 2024. Then it started a new cutting cycle, lowering the Funds rate 1% in three steps that fall. After sitting tight for most of 2025, the Fed cut three more times last fall. The overnight Funds range of 3.5% to 3.75% set at the December 10 meeting will likely remain in place through the spring.

The Committee’s press release and Powell’s press conference left investors in the dark as to the future direction of rate moves. Chair Powell stated in his press conference that the Committee “remains well positioned” to respond to changes in the job or inflation outlook. 

Mixed

He noted that housing activity remains “weak.” The job market has “clearly softened” and hiring remains “low.” Unemployment at the end of 2024 stood at 4.1%, versus today’s 4.4%, slightly softer, but not enough to warrant more cuts in our view. Those statements contrast with his assertion that the U.S. economy is starting 2026 “on a firm footing.” He also said that the economy is growing at a “solid pace,” and that “essentially the economy has once again surprised us with its strength.”

Inflation received little attention from the Committee or Powell. The press release deleted the phrase “has moved up since earlier in the year” and left inflation “remains somewhat elevated.” Powell’s only mention was that inflation would come down after tariff effects wear off. In other words, enjoy the economy and pay higher prices. 

Noise

Powell did not address any of the recent headlines around the Fed or his job prospects. Recall the recent headlines concerning a Justice Department investigation into the Fed’s remodeling costs. Powell’s term as Chairman ends May 15 and his board seat ends in January 2028. Powell stated that the Committee’s integrity comes first and would not comment on statements from administration officials or Senators. 

Summary

After the October meeting we wrote: “We think the Fed cuts one more time after realizing that the economy is doing better than news reports suggest.” They did cut a quarter point in December. At that meeting they, for the first time in recent memory, raised their estimates for economic growth. Good timing on their part, as GDP growth has surpassed expectations in the past two quarters. Third quarter GDP grew at a 4.4% annual rate, well above 2.5% forecasts. We expect fourth quarter figures to show similar growth.

Markets still want two cuts but are grudgingly pushing those cuts back to later in the year. We still believe the Fed will be surprised at the economy’s strength come May. The chatter around a rate hike thanks to an improving economy will not go away.

Fiscal stimulus from Congressional spending will ramp up later in the year. One Big Beautiful Bill tax refunds start next month, although checks could be delayed by another shutdown this weekend. Monetary stimulus from the Fed’s bond buying is injecting money into the economy and holding down interest rates. Credit policy is also stimulative right now. Rarely have we had all policy tools boosting the economy. Despite geopolitical and “Fed independence” noise, the year is off to a good start.

Please let us know how we can help you. 

Steve Orr is the Managing Director and Chief Investment Officer for Texas Capital Bank Private Wealth Advisors. Steve has earned the right to use the Chartered Financial Analyst and Chartered Market Technician designations. He holds a Bachelor of Arts in Economics from The University of Texas at Austin, a Master of Business Administration in Finance from Texas State University, and a Juris Doctor in Securities from St. Mary’s University School of Law. Follow him on Twitter here. 

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