In January, the Federal Reserve decided to keep the Fed Funds Target Range at 3.50%–3.75%, which was what many expected. The vote was 10–2, with some members favoring a rate cut. The Committee observed that while inflation is still slightly high, they no longer see risks to employment increasing.

Economic Conditions

Chair Powell reported that the US economy is stable, with current policies supporting both employment and inflation goals. Although the housing market is weak, effects from the government shutdown should soon improve. Powell mentioned that while the job market appears to be stabilizing, job growth has slowed down and the market is softening. Regarding inflation, Powell pointed out that it remains slightly above the Fed’s target. Core PCE inflation was estimated to be 3% in December, with most price increases linked to tariffs on goods. Current policy rates are neutral, and Powell stressed the need for flexibility in future adjustments. He believes inflation expectations are stabilizing, with reduced risks in both areas of their mandate. Interest rates set by central banks affect the costs of loans and returns on savings. Higher rates can strengthen a national currency, making it more appealing for investors. They might also lower gold prices due to increased opportunity costs. The Fed funds rate directly affects overnight lending rates between banks in the US. By keeping rates steady, the Federal Reserve has removed the immediate risk of a sudden rate hike, opening the possibility for cuts later this year. The dissent from two members seeking a cut indicates that the internal discussions are leaning towards easing. Therefore, we should prepare for a market that isn’t expecting hikes but is seeking the timing of cuts. The labor market will likely trigger a rate cut, as indicated by Chair Powell. The latest Non-Farm Payrolls report for 2025 showed a softer number at 155,000, continuing a trend of cooling from earlier in the year when numbers were above 200,000. Any further weakness in upcoming job reports could lead interest rate futures to price in a cut sooner, possibly moving from the June meeting to May.

Market Implications

Powell’s focus on core inflation, excluding tariff effects, suggests that the Fed is ready to overlook some headline numbers. The latest Consumer Price Index (CPI) report for December 2025 showed headline inflation easing to 3.1%, reinforcing the idea that core pressures are under control. This is bearish for the U.S. Dollar since other central banks may not be as quick to indicate future cuts. For stock markets, this policy position reduces a major obstacle and lowers risk. With no rate hikes on the horizon and the economy described as “solid,” implied volatility in index options is expected to stay low or decrease. This environment favors strategies that benefit from stable or rising stock prices, such as selling out-of-the-money put options. We can compare this situation to the pivot in 2019 when the Fed paused rate hikes and began cutting rates mid-year due to signs of a slowing economy. That time was positive for non-interest-bearing assets like gold. With the possibility of future rate cuts and a weaker dollar, traders might want to consider building long positions in gold derivatives. Create your live VT Markets account and start trading now.

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