The Fed's "quick hold" decision: When caution prevails

In the latest press conference, Fed Chair Powell announced a swift decision to halt the rate-cutting cycle after just three consecutive cuts, keeping the interest rate steady at 3.5%-3.75%. This decision reflects careful consideration by the Fed amid various economic pressures, as the U.S. economy still shows strong resilience and inflation has not yet reached the 2% target.

However, not all Fed members agree. Governors Stephen Miran and Christopher Waller voted against, supporting an additional 0.25% cut, indicating a more dovish stance within the central bank. Notably, the Fed removed language emphasizing risks of weakening labor, suggesting that the two risks—inflation and growth—are now more balanced, no longer exerting pressure for rapid monetary easing.

Why is the Fed “quickly” stopping the rate-cut cycle?

The U.S. economy continues to surprisingly withstand high interest rates, as Powell states. Although consumer sentiment surveys show signs of weakness, actual spending remains robust. Hiring pace has slowed somewhat, but layoffs remain low, indicating the labor market has not weakened.

The decision to pause further rate cuts reflects the Fed’s determination to ensure inflation genuinely returns to the target before easing policy. When questioned about the hawkish tone, Powell emphasized that the Fed will let data guide decision-making, with no specific timing for future cuts announced.

U.S. economy “still rapidly” growing despite high interest rates

Businesses are benefiting quickly from new AI applications, significantly boosting productivity. This productivity increase plays a crucial role in maintaining GDP growth, allowing the economy to continue expanding even in a high-rate environment. However, real estate remains the biggest weakness, as prolonged high interest rates have heavily impacted this market.

Inflation: The “quickly” challenge that’s hard to solve

Regarding tariffs, Powell believes most of the inflation impact has been reflected, with only slight increases. Without new tariffs, inflation is likely to gradually return to 2%. However, core PCE inflation is currently flat, with no clear progress. This situation makes it difficult for the Fed to pinpoint exactly when inflation will start to decline further.

When asked about the possibility of raising interest rates again if inflation rises, Powell affirmed that no one at the Fed currently considers rate hikes as the baseline scenario, reassuring markets that the peak interest rate has likely passed.

AI and the labor market: Impact in the “near future”

Powell offers a long-term view on AI, stating that while this technology may slow hiring in the short term, it will significantly boost productivity. History shows that technological disruptions cause temporary employment upheavals, but in the long run, they lead to higher productivity, greater output, and better wages. The Fed is closely monitoring trends of companies pausing hiring to assess AI’s real impact on the labor market.

Political balancing: Maintaining Fed independence

Powell reaffirmed the importance of the Fed’s independence amid pressures from President Trump and legal issues surrounding the leadership. He declined to comment on the Department of Justice investigation or his personal future after his term as Chair ends.

Overall, Powell is carefully balancing two pressures: maintaining a firm tone strong enough to avoid being seen as politically influenced, but not so hawkish as to weaken the economy. This explains why his initial remarks were quite firm, but his tone softened throughout the press conference.

Market impact: Signs from asset prices

The Fed’s decision to keep interest rates high was quickly reflected in asset prices:

• BTC: Down 6.21% to $71.36K
• PAXG (Gold): Down 3.87% to $4.89K
• XAG (Silver): Down 12.68% to $78.98

This decline indicates that investors are rapidly adjusting their portfolios in response to the Fed maintaining high rates longer than expected.

Outlook: Cautious but not forever

The final message from the Fed is that the economy remains resilient enough to withstand high interest rates, inflation is not yet low enough for early cuts, but the long-term trend still points toward easing. The Fed plans to keep rates high for a period before gradually reducing them more quickly if economic signs weaken. This decision reflects a “cautious” Fed that looks ahead but remains prepared for future adjustments.