Policy rates on hold as the Fed signals patience

Highlights: As expected, the FOMC decided to keep the federal funds target range steady at 3.50-3.75 per cent in January, following a sequence of rate cuts at the September, October, and December policy meetings last year. While the Fed did not ease at this meeting, the 10-2 vote split, with two FOMC voters favouring a 25bp rate cut indicates modest bias towards less restrictive rate policy within the Fed. Fed chair reiterated the data-dependent approach and noted that both upside risks to inflation and downside risks to labour market had diminished modestly. We continue to overweight investment grade corporate bonds, where we still see opportunities for investors to acquire quality investment grade assets that should provide a solid yield. We expect USD to remain under selling pressure in the coming weeks. For equity investors, robust economic growth and strong corporate earnings continue to be supportive. Combined with the ongoing tech revolution led by AI, this backdrop underpins our global overweight to equities, with a mild overweight stance on US markets.

• Changes to the January statement were minimal and focused on reassessments of labour market conditions and inflation dynamics
• Fed Chair Jerome Powell stated that monetary policy is not on a preset course, and future decisions will be made on a meeting-by-meeting basis, guided by incoming data, the evolving outlook, and the balance of risks
• Regarding economic growth, Powell mentioned that the growth outlook has improved since the last FOMC meeting, with incoming data suggesting 2026 is starting on a solid footing
• Chair Powell reiterated that inflation remains above the Fed’s target and described the current inflation mix as modestly positive. He noted that much of the tariff impact has already passed through prices and is seen largely responsible for recent goods inflation. He characterised tariffs as more likely to cause a one-time price increase rather than persistent inflation
• Our view is that the FOMC will keep the federal funds target range unchanged at 3.50-3.75 per cent through 2026 and 2027, though as always, there will be important double-sided risks to this outlook to consider as the economy evolves
• According to the latest FOMC dot plot, the median dots imply roughly one 25bp cut in 2026 and an additional 25bp rate cut in 2027