By Benjamin Picton, Senior Market Strategist at Rabobank

The US Federal Reserve’s rate setting committee left the Fed Funds rate unchanged at 3.50-3.75% with the Statement noting that “economic activity has been expanding at a solid pace...the unemployment rate has shown some signs of stabilization. Inflation remains somewhat elevated.” The decision was taken by a 10-2 vote, with Trump appointee Stephen Miran and Fed Chair hopeful Christopher Waller both dissenting in favor of a 25bp cut. The Bank of Canada, also meeting to set policy rates, similarly opted to keep rates unchanged at 2.25%. Our full review of the FOMC decision is available here, and the BOC decision here.

2 and 10-year Treasury yields were little changed on the day and equities were mixed. Fed-dated OIS saw the market-implied future path of the Fed Funds rate lift by 2-4bps over the remainder of the year. The S&P500 closed virtually flat after briefly hitting 7000 intraday and the NASDAQ eked out a 0.24% gain. The dollar found some support after Treasury Secretary Scott Bessent told CNBC that the US was still committed to the strong dollar policy and was “absolutely not” intervening in currency markets to support the value of the Japanese Yen. USDJPY closed 0.79% higher on the day, but has resumed selling in early trade this morning.

In his press conference Powell reiterated that some recent data suggested that the labor market has stabilized, despite the very low rate of hiring in the USA. He also said that the outlook for economic activity had “clearly improved” since the last meeting, and that that would matter for labour demand and employment over time. Powell characterized the labor market as exhibiting weak demand but that this was offset by weak supply as labor force growth was constrained by lower immigration and labor force participation. This is a variation on the “no hire, no fire” meme.

When asked why he attended a Supreme Court hearing on Lisa Cook’s case and to respond to a comment by Scott Bessent that his attendance was “political” Powell declined to answer the latter and said that he believed that the court case was perhaps the most important in the Fed’s 113-year history. In that context, he said he believed it would be difficult to explain why he didn’t attend. Having clearly anticipated this line of questioning, he came armed with a precedent – pointing out that Paul Volcker similarly attended a Supreme Court hearing in 1985.

Powell also dead-batted questions about his January 11th press conference where he sensationally suggested that grand jury subpoenas issued by the Department of Justice were politically motivated, and also declined to answer questions on whether he would choose to remain a Fed Governor after his term as Chairman expires in May.

This was Powell at his most technocratic. With midterm elections looming later in the year, and the President poised to gain greater control of the FOMC from May onwards, Powell may have been keen to strike a blow for establishment views on formulaic policy making where monetary policy is adjusted according to a recipe (reaction function) with 2% inflation and maximum employment the desired outputs. Conversely, Miran’s decision to vote for a cut of only 25bp (after voting for 50 at the three previous meetings) might be interpreted as an attempt to lower the temperature between the White House and the central bank, before resuming hostilities later in the year when Powell is replaced as Chair.

Obviously, paint-by-numbers inflation targeting is the virtual antithesis of the administration’s view that monetary policy should work in concert with other tools to achieve the domestic and foreign policy goals of the United States. How can the US Dollar, capital markets or Fed swaplines be mobilized to support US interests if those tools are gatekept by independent technocrats pursuing a much narrower definition of the national interest? How can the flow of credit be effectively diverted to priority industries (semiconductors, energy, defence etc) while interest rates are set dispassionately and indiscriminately across the entire economy? As some administration figures may be happy to point out, that is not how things work in China.

Under such circumstances where the central bank cannot be brought to heel, it seems logical to expect increased subordination through fiscal dominance and other actions of the US Treasury to assert control over tools of monetary policy. Stablecoins is one such area that we have written about previously.

While rates and FX markets were focused on the Fed, gold and silver are again resetting all-time highs. Silver is up 1% at time of writing to $117.85/oz. Gold has busted through the $5500/oz level and has now risen more than $500/oz over the last four days. With Brent crude prices also up 0.56% to $68.78/bbl this morning, it would seem that geopolitics is again a major influence on these moves (along with the weaker dollar).

Donald Trump took to Truth Social overnight to warn Iran to “make a deal”. His post said that a “massive armada” led by the USS Abraham Lincoln was headed to the region – a fleet larger than the one deployed to the Caribbean to conduct operations again Venezuela – and that “the next attack will be far worse” than earlier US strikes on Iran’s nuclear facilities.

Clearly, the Iran issue is not going away and the price action in energy and metals is telling us that this is a market that will continue to move on geopolitical stimuli. Technocratic approaches to trading it based on economic variables like GDP, employment and inflation are much more risk-laden than they used to be.