January 28 FOMC Meeting Analysis

Hi everyone, I’m Caroline Castavan.

I’m the Senior Financial Strategist here at the Federal Home Loan Bank of Boston, and I really appreciate you tuning in to our first FOMC Strategy Update.

In this brief video, I want to do four things.

First, I’m going to walk you through an overview of what happened at today’s FOMC meeting.

Second, I want to take a step back and look at the underlying economic data.

Third, I want to give you an update on what happened with the yield curve and market pricing after the meeting. And fourth, I want to talk about what it means for your balance sheet.

So, at the January FOMC meeting, the FOMC kept the target rate unchanged at 3.5 to 3.75%, as was widely expected.

We had two dissents from Governors Waller and Myron, both of whom preferred a 25-basis point cut.

The FOMC also issued an implementation note, which instructs the New York Fed to buy Treasury bills in a quantity required to maintain an ample level of reserves.

There’s no specific number specified in the note, but note that Treasury bill purchases have increased by over $60 billion since this was first announced in December.

In the FOMC statement, there were two notable changes.

First was that the characterization of growth was upgraded from moderate to solid, and the second is that the language was tweaked to downplay the risk to the labor market.

The unemployment rate was described as showing signs of stabilization, and the language noting greater downside risks to employment was removed.

We had no SCP this meeting. We’ll get an updated one next meeting, and in Chair Powell’s conference, he focused on the clear improvement in the outlook for growth, citing both surveys and also real data that we’ve seen from the end of 2025. Let’s turn to inflation in the labor market.

Another thing that came out of this meeting was that the committee reaffirmed their statement on longer-run goals and monetary policy strategy, which includes a 2% target.

This was widely expected, so it’s not surprising, but it has been in focus given that inflation has been running well above target for a long time now.

For reference, the latest reading of annualized core PCE, which is what the Fed targets, was 2.8%. That’s down from a peak of 5.6% in 2022.

The most recent inflation data showed that many sectors that have been peak sources of inflation, like shelter and autos, have come down a lot.

However, you’ve also seen core PCE print above 2% since March of 2021, so that’s almost five years of being above target.

The reason that the Fed’s not more worried about this is that inflation expectations have remained in check.

The University of Michigan expected inflation in the 5 to 10-year range is at 3.3%, which has come down a lot since the peak of tariffs last year.

Similarly, if you look at market-based measures like the 10-year breakeven, which is derived from TIPS, you’re seeing that figure around 2.3% and stayed in that range for the last few months.

One thing to watch going forward is going to be whether or not those figures trend upward if inflation persists above target or if trend down if you actually see the components of inflation that are most affected by tariffs start to moderate.

The FOMC was much more constructive on the labor market today than they have been in recent months.

Part of that is because the actual unemployment rate has ticked down a little bit to 4.4% having crept up over last year.

Most of the move upward in unemployment was a product of the fact that hiring has really moderated even though layoffs haven’t picked up too much.

It’s worth knowing that in history when this has happened, it’s sometimes been followed by an increase in layoffs.

So I think there are still reasons to be concerned about the employment outlook, particularly because you’re seeing things like sentiment about the labor market and certain leading indicators like temporary help really trend downward.

However, the case for the labor market not to deteriorate from here is that you’ve seen incredibly strong growth data.

We don’t have Q4 GDP figures yet, but the Atlanta Fed is estimating that that’s going print at 5.4% annualized for the quarter.

Those are incredibly high figures.

And what’s interesting is that some of this growth is a product of personal consumption, which has held up much stronger than expected and much stronger than would be anticipated given the weak survey data about sentiment.

But a lot of the growth data seems to be a product of gross private domestic investment, which is really AI spending.

So what’s going be interesting to see over the coming months and years is how investment in AI actually translates to outcomes for the labor market.

Okay, so let’s turn back to markets.

At the conclusion of this meeting, the market is pricing just under two 25-basis-point cuts by year end and the first full cut by the end of July.

That’s little change from yesterday.

So you weren’t getting a lot of price action out of the meeting.

In terms of the shape of the yield curve, treasury yields are lowest at the one-year point, but they’re upward sloping thereafter.

So what does this mean for your balance sheet?

If you take a step back by historical standards, interest rate volatility is really low and credit spreads are really tight.

But we live in a very uncertain time.

You’re going see a change in leadership at the FOMC in May, but most committee members won’t change.

And you’re clearly seeing a committee that’s somewhat less concerned about unemployment and therefore probably less likely to cut quickly.

What I’d be thinking about is how to build room on your balance sheet to add asset duration.

What that means is obviously going to depend on your specific business model, what you’re seeing for demand for loan issuance, your capacity to buy fixed income products.

but I’d be thinking about maintaining flexibility so that you’re well positioned to act if you do see a change in valuations.

The other thing I’d be thinking about is that a lot of the forecasts now depend on this assumption that you’re going to see continued moderation at shelter inflation.

Personally, I think that you will because there’s lots of leading indicators that suggest we’re going to be moving that way and you’ve already seen shelter inflation come down a lot, but I would be really thoughtful about the various outcomes that might impact you related to shelter inflation, particularly because we’re seeing more policy initiatives in the space.

Most recently, President Trump instructing agencies to buy 200 billion in mortgages.

Think about what that might mean for your balance sheet.

Think about your exposure to residential mortgages and plan some risk management for a variety of outcomes that could impact shelter and also overall inflation.

Thanks for tuning in.