Fed keeps rates on hold and isn't in a hurry to adjust lower

The Federal Reserve kept interest rates unchanged at its first FOMC meeting of the year, holding the Fed Funds rate at 4.5% on the upper bound. The accompanying statement to the decision was largely unchanged though the FOMC did drop a line from previous messages that “inflation had made progress toward the Committee’s 2% objective” and instead said that “inflation remains somewhat elevated.” In his press conference that followed the unanimous decision, Fed Chair Jerome Powell stressed that the Fed was not “in a hurry” to adjust rates lower in 2025 and that the FOMC was “very much in the mode of waiting” to assess the impact of the policies of the new Trump administration on inflation. Powell also said that Fed policy was “meaningfully” above the neutral rate of interest.

The Fed’s January decision was widely expected by markets so moves following the FOMC announcement were relatively limited. However, the Fed did come under immediate criticism from President Trump who said he would “let it be known” that he disagrees with the Fed stance and that he “will do it” on reducing inflation. For his part Fed chair Powell said he had no “comment or response” to pressure from the President on monetary policy.

The Central Bank of the UAE kept its own policy rates unchanged following the FOMC announcement

The Bank of Canada cut policy rates by 25bps, taking the overnight rate to 3%. Unlike the Fed, the BoC made explicit reference to the risks of the new Trump administration’s policies, saying that the resilience of “Canada’s economy would be tested” under wide ranging tariffs from the US.

CPI inflation in Bahrain rose by 0.5% y/y in December, marginally faster than the 0.4% recorded a month earlier. Inflation in Bahrain recorded an average of 0.9% y/y in 2024, faster than the 0.1% recorded in 2023.

Egypt’s prime minister announced that the country had discovered a new oil resource in the Suez region that has the potential to produce 5k b/d.

Today’s Economic Data and Events

• 10:00 KSA GDP y/y Q4
• 10:30 FR GDP y/y Q4: forecast 0.8%
• 13:00 GE GDP y/y Q4: forecast -0.3%
• 14:00 EC GDP y/y Q4: forecast 1%
• 17:15 ECB deposit facility rate: forecast 2.75%
• 17:30 US GDP annualized Q4: forecast 2.7%
• 17:30 US initial jobless claims Jan 25: forecast 225k
• SA SARB interest rates: forecast 7.5%
• KSA SAMA net foreign assets Dec

Fixed Income

• Notwithstanding some immediate post Fed wobbles, US Treasury markets largely took the FOMC decision in their stride with minimal moves. Yields on the 2yr UST settled just shy of 2bps higher at 4.2135% while the 10yr was near unchanged at 4.5284%. Markets are still pricing in two 25bps cuts this year with the first cut tentatively priced in for June followed by another in December.

FX

• Currency markets largely shrugged at the widely expected Fed decision. There was a moderate push to dollar strength though muted by the standard of moves since the start of the year. EURUSD was less than 0.1% lower at 1.0421 while GPBUSD was moderately stronger at 1.2452. USDJPY moved in favour of the yen, lower by 0.2% at 155.22.
• Commodity currencies were consistently weaker with USDCAD up 0.1% at 1.4419 while AUDUSD fell 0.4% at 0.6231 and NZDUSD dropped 0.1% to 0.5659.

Equities

• US equity markets closed lower. The Dow Jones fell 0.3% while the S&P 500 gave up 0.5% and the NASDAQ dropped the same amount. European markets had ended the session earlier in the day up more positively.
• The DFMGI sank almost 1% overnight while the ADX had gains of 0.4%. The TASI closed higher by 0.2%.

Commodities

• Oil prices pushed lower overnight as markets remain on edge over whether the Trump administration will impose tariffs on key trading partners. Brent futures fell 1.2% to USD 75.68/b while WTI fell by 1.6% to USD 72.62/b. Longer-dated (1-6 month) backwardation in the Brent market narrowed to around USD 3.50/b while the same spread in WTI narrowed to around USD 3/b.
• EIA data reported a larger than expected build in US crude inventories with total crude stockpiles up 3.5m bbl last week. Gasoline inventories also increased, up almost 3m bbl versus an expectation of just 245k while distillate stockpiles fell during cold weather conditions in the US. Oil production in the US dipped back by about 240k b/d to 13.2m b/d while product supplied rose by 1.5m b/d w/w to 21.1m b/d.
• OPEC+ will discuss the Trump administration’s desire to increase domestic US oil production at their JMMC meeting next week, according to a statement in the Russian media.