The Fed held the policy rate at 3.50–3.75%, with Governors Stephen Miran and Christopher Waller dissenting in favour of a 25-bp cut.
The Fed noted that the unemployment rate has “shown some signs of stabilisation” and that risks to inflation and employment have become more balanced, supporting a pause and pushing back the timing of rate cuts.
The divergence between strong economic data and softer consumer sentiment suggests growth may be increasingly uneven.
We still expect two 25-bp rate cuts in 2026, now pencilled in for June and July (versus April and June previously), bringing the target range to 3.00–3.25% by end-2026.
With markets increasingly pricing in tolerance for a weaker dollar, we expect the FOMC decision to have only a limited impact on the dollar. Continued USD weakness should provide room for further ringgit appreciation.
We see limited implications for BNM policy, with the OPR expected to remain at 2.75% through 2026 amid firmer domestic demand and improving external conditions.
Fed kept policy rate steady
As widely expected, the Federal Reserve (Fed) voted 10-2 to maintain the federal funds target range at 3.50–3.75% in the first meeting of the year, following a series of rate cuts totalling 75 bps in 2025. Dissenting votes included Governor Stephen Miran and Governor Christopher Waller, who favoured a 25-bp cut.
The Fed noted that the unemployment rate has “shown some signs of stabilisation” and that upside risks to inflation and downside risks to employment have somewhat reduced. Chair Jerome Powell reiterated that the Fed is “well positioned to see how the economy will unfold,” reinforcing the view that policy remains data-dependent and that the Fed is likely to stay on hold for now.
Growth resilience contrasts with weaker sentiment
The US economy has remained more resilient than expected. Final 3Q25 GDP expanded at an annualised pace of +4.3% (2Q25: +3.8%), beating consensus estimate of +3.2%, supported by firmer consumer spending, exports and government spending. Growth momentum has held up despite earlier concerns that tariff headwinds would weigh on the economy.
In contrast, consumer sentiment paints a weaker picture. The Conference Board’s consumer confidence index fell to 84.5 in January (Dec: 94.2), marking the lowest level since May 2014. Consumers cited challenges in securing jobs, alongside continued pressure from elevated prices for essentials such as groceries and fuel.
The divergence between strong economic data and softer sentiment suggests growth may be increasingly uneven. Productivity gains linked to AI-related investment may allow firms to raise output with fewer hiring, while inflation and slower job growth weigh on household income. Powell emphasised that managing price stability is key to addressing affordability issues among lower-income group.
Balanced risks between inflation and the labour market
Core PCE inflation held steady at +2.8% YoY in November (Oct: +2.7%). We see risks to the inflation outlook tilted to the upside, mainly from delayed tariff pass-through as firms adjust prices to protect margins. Trade policy uncertainty under the Trump administration could add to goods inflation pressures. That said, the Fed was relatively optimistic on the inflation outlook, noting that the impact is likely one-off.
Labour market signals remain mixed. Nonfarm payrolls rose by 50k in December (consensus: 70k; Nov: 56k), pointing to softer hiring momentum, while the unemployment rate edged down to 4.4% (Nov: 4.6%). Markets will likely see the prevailing “no-fire, slow-hire” dynamic as a sign of labour market stabilisation, helping to support consumer spending, which accounts for c.68% of GDP.
Overall, the Fed sees risks to inflation and employment as more balanced, with broad support within the committee to hold rates at this meeting. Our baseline easing view remains intact, but we now see rate cuts pushed back toward mid-year.
Fed Chair succession remains in focus
Market attention has turned to potential candidates for the next Fed Chair, with Powell’s term ending in May. President Trump indicated that Kevin Hassett will remain in his current advisory role, while prediction markets increasingly point to BlackRock CIO Rick Rieder as a frontrunner. Rieder is widely seen as a dove, having signalled support for lowering policy rates to 3.00%.
Under our updated hypothetical 2026 FOMC composition (Figure 1), the hawk-dove balance would tilt slightly more dovish, with one hawkish member replaced by a dovish one. While a Rieder chairmanship may imply a more dovish-leaning consensus, the committee still hold diverse views on inflation and labour market dynamics.
Pushback in timing of rate cuts
We still expect two 25-bp rate cuts in 2026, now pencilled in for June and July (versus April and June previously), bringing the target range to 3.00–3.25% by end-2026. The Fed is likely to monitor both the evolving inflation and labour market conditions, as well as the monetary transmission of the 75 bps of rate cuts delivered in 2025.
Room for ringgit appreciation; steady OPR outlook
Despite a recent uptick in UST yields, the dollar index has weakened by 1.8% to 96.5, with markets increasingly speculating that Washington may be more comfortable with a weaker dollar. This has supported other currencies, including the ringgit, which has strengthened year-to-date by 3.4% to 3.92. As such, the FOMC meeting is likely to have only a limited impact on the dollar. Continued USD softness should provide room for further ringgit appreciation.
We see limited implications for BNM’s monetary policy, with the OPR expected to remain at 2.75% through 2026 as policy stays accommodative amid firmer domestic demand and improving external conditions.
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| Currency | Buy Rates (RM) | Sell Rates (RM) |
|---|---|---|
| USD | 3.919293 | 3.946936 |
| EUR | 4.633085 | 4.642854 |
| CNY | 0.566482 | 0.567657 |
| HKD | 0.501330 | 0.505404 |
| SGD | 3.081887 | 3.107305 |