Powell's term enters the countdown stage, the Fed signals a longer pause in interest rate cuts

As Federal Reserve Chairman Powell's term comes to an end, the tone of US central bank policy is becoming more stable. Powell stated at a press conference on Wednesday that he believes he has kept the economy on a "solid foundation," which also means that the Fed may enter a longer period of interest rate pause. Following the Federal Open Market Committee (FOMC) meeting on January 27th and 28th, the Fed voted 10-2 to keep the federal funds rate unchanged at 3.5% to 3.75%. Prior to this, the Fed had cut interest rates by a total of 75 basis points in the second half of last year. Fed governors Waller and Mester voted against the decision this week, advocating for another 25 basis point rate cut. The policy statement shows that the FOMC updated the description of economic growth from "moderate expansion" in December to "solid growth," and noted that employment growth is still modest, but there are signs of stability in the unemployment rate. At the same time, the Fed removed the previous mention of rising downside risks in the labor market and emphasized that inflation is "still slightly high." Powell also reiterated to reporters that the current policy rate is in a "reasonable range close to neutral," and can be adjusted flexibly based on future data changes. Vincent Reinhart, chief economist at investment firm Mellon Bank, and former senior Fed official, stated that the Fed's rate cuts in the second half of last year were like "buying insurance" to prevent further weakening of the labor market. However, since employment has not deteriorated significantly and inflation remains above target, this supports the Fed's decision to maintain current policies. Analysts at Morgan Stanley and Macquarie also believe that Powell's comments reinforce the signal to "stay put for a longer period," although the market still expects some mild easing later this year. Powell's economic tone is more optimistic than in recent months. He mentioned that consumer spending remains resilient, business investment is ongoing, productivity is rising, while acknowledging that low-income families are under pressure to cut back on spending and turn to cheaper options. He pointed out that recent economic growth is partly driven by early investments related to artificial intelligence. As for inflation, Powell estimates it is still around 3%, significantly higher than the Fed's annual target of 2%. He believes that tariffs have raised prices of goods, but inflation in the service sector is still easing. Powell stated that the most severe impacts of tariffs may gradually diminish by the end of this year, emphasizing that "rate hikes are not anyone's base case." Although Powell has previously warned that there is no "risk-free path" for the Fed, as inflation pressure and weak labor market coexist, he took a more positive attitude at this press conference. Chief economist at NISA Investment Advisors, Stephen Douglass, pointed out that Powell emphasized that the risks of stagflation are diminishing, and the dual risks of rising inflation and falling employment are easing. On political matters, Powell remained cautious. He refused to comment on a Justice Department subpoena, White House criticism, US dollar exchange rates, and whether he would continue to stay on the Fed board after his term ends, repeatedly saying "I have no more information." However, when asked why he personally attended the Supreme Court oral argument regarding the Trump administration's attempt to dismiss Fed Governor Quarles, Powell responded that this may be the "most important legal case in the 113-year history of the Fed." He stated that there is precedent for the Fed Chair to attend such hearings, and that appearing in person makes it easier to explain to the public compared to being absent. Powell also made a lengthy speech on central bank independence. He emphasized that independence is intended to protect the public from the risk of monetary policy being used for short-term political interests, and once public trust is lost, it will be difficult to restore. He also stated, "We have not lost this independence, and I believe we won't." It is widely expected in the market that President Trump will announce Powell's successor in the coming weeks. Powell stated that he would give three pieces of advice to the successor: stay away from election politics, consider communication with Congress as a core responsibility, and rely on Fed's professional and public interest-oriented staff. It is noteworthy that the two dissenting votes in this meeting contrast with Powell's optimistic economic tone. Mester, as an official appointed by Trump, has consistently advocated for rate cuts at every meeting she has participated in. Waller's dissenting vote is more noteworthy, as there was no clear indication beforehand. Reinhart believes that this makes Waller's dissent more weighty. Waller is also considered one of the four candidates selected by Trump to be the next Fed chair.