Fed Talk 1.28.26

Notable comments from Chairman Powell during today’s FOMC press conference and announcement.

From the FOMC Statement :

• “Increase the System Open Market Account holdings of securities through purchases of Treasury bills and, if needed, other Treasury securities with remaining maturities of 3 years or less to maintain an ample level of reserves.”:  As stated at the last FOMC meeting, the implementation note, specifically the inclusion of Treasury securities with maturities out to three years to maintain “ample reserves,” in our view leaves the door open for future balance sheet expansion and the easing of credit conditions in the name of controlling the Fed funds rate.  We have long argued that the size and maturity composition of the balance sheet are the true primary monetary policy tools in the post–financial crisis, ample-reserves regime.

From the FOMC press conference:

• “The expectation is that we will see the effects of tariffs flowing through goods prices, peaking, and then starting to come down.”: Powell reiterated that the base case is that tariff-related inflation is likely to pass through as a one-time price increase. He followed up by noting that if you look beyond “goods” inflation and focus on “services,” you continue to see ongoing disinflation.

• “The U.S. federal budget deficit is uncontroversially on an unsustainable path…But, right now we’re running a very large deficit at essentially full employment, and so the fiscal picture needs to be addressed.”:  Powell addressed a reporter’s question referencing recent bond market spikes, most notably in Japan, and whether a similar move could occur in the U.S. Many factors influence the long end of the yield curve (Treasuries at 10 years or longer), including economic growth, inflation expectations, volume of issuance, fiscal policy, and many others.  One point we have consistently argued is that, since the shift to an ample-reserves monetary policy regime during the financial crisis, the influence of short-term rate movements on long-term rates has been diminished.

• “Geopolitical risk for us is a lot of it is around energy, oil, and so far, we haven’t—with for all the turmoil…oil prices have come down as you know, and so we don’t really see much.”:  When pressed by a reporter about geopolitical risk as it relates to the U.S. economy, Powell referenced the overall muted response of oil prices over much of the past two years. Both Brent and WTI have traded below $60 per barrel at points over the past 12 months. This movement in oil prices has been a meaningful tailwind for the Federal Reserve in its fight against inflation over the past two years.

• “..the lore is that when GDP and the labor market get into an argument, in the end…the labor market data is more reliable. GDP data is very hard to collect and understand.”: This comment from Powell references the recent spikes in short-term GDP figures alongside slowing labor market data. Ultimately, he argues, labor market data is a much stronger indicator of future economic performance.

• “So, we look at those things, we don’t get spun up over particular asset price changes, although we do monitor them, of course.”: Powell was asked to comment on the recent spike in gold and silver. Typically, movements in precious metals—especially gold—reflect inflation expectations or, in many historical cases, a flight-to-safety response by investors. Powell reinforced that long-term inflation expectations remain well anchored and emphasized that this is a more important metric for the Fed to monitor than movements in precious metals.