US | Fed set to pause as it balances labor risks and strong demand

Summary

The FOMC will likely continue to emphasize optionality and data dependence as possible inflationary pressures from tariffs could have been masked thus far by import frontloading and the offsetting cooling of shelter inflation.

Key points

• Key points:
• The Fed is set to pause its easing cycle this week, keeping the policy rate unchanged at 3.50-3.75%, but will avoid signaling that the easing cycle has definitively ended.
• Recent data indicate that 2025 growth significantly outpaced initial expectations; this momentum provides a positive carryover into 2026.
• The labor market remains in a “low-hire, low-fire” equilibrium, with limited layoffs offsetting subdued job creation and preventing a sharper rise in unemployment.
• Even with limited evidence of tariff-related price pass-through so far, upside inflation risks from strong demand are likely to remain central to the Fed’s assessment.
• Since the December FOMC meeting, financial markets have increasingly aligned with the view that the Fed will keep rates unchanged in the near term.

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