Fed Halts Easing Cycle as Powell Bets on 'Solid' Economic Resilience

The Federal Reserve voted to keep the federal funds rate unchanged at 3.50% to 3.75% on Wednesday, hitting the pause button after three consecutive rate cuts. While the decision was widely anticipated by markets, the move revealed growing fissures within the central bank, marked by two notable dissents and a shifting narrative on the US economic outlook.

• Federal Funds Rate: 3.50% - 3.75%
• Unemployment Rate: 4.4%
• Core PCE Inflation: 3%

A 'Hawkish Hold' with Internal Divisions

Unlike previous unanimous decisions, this meeting saw Governors Christopher Waller and Stephen Miran break ranks, voting instead for a continued 25 basis point reduction. This dissent is particularly significant for Waller, marking his first divergence from the consensus in this cycle.

Despite the internal split, the FOMC statement offered an upgraded assessment of the economy. The language shifted from characterizing expansion as “moderate” to “solid,” and noted that the labor market, previously seen as weakening, is now showing “signs of stabilizing.” The unemployment rate remains steady at roughly 4.4%.

Powell: Tariffs, Not Demand, Driving Inflation

Addressing the elephant in the room—high inflation prints—Chair Jerome Powell struck a confident tone. He acknowledged that Core PCE inflation hovers around 3%, well above the 2% target, but attributed the persistence almost entirely to the “tariff effect” on goods prices.

“The high readings largely reflect increases in the goods sector driven by tariffs,” Powell stated during his press briefing. Crucially, he framed this as a temporary, or “one-off,” price level adjustment. Powell expects this tariff-induced pressure to peak and fade by mid-2026, assuming no new trade barriers are erected.

Policy Path: No Hikes, No Preset Cuts

Powell firmly pushed back against any speculation that the Fed might need to reverse course and hike rates, stating that a return to tightening is “not anyone's baseline case.” However, with the economy on firmer footing than expected, the central bank signaled it is in no rush to resume easing, adopting a strictly data-dependent stance for future meetings.